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The Treasury Bond ‘scam’: Are we not entitled to know our creditors?

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By A Special Correspondent

According to our Constitution “We”, the People, are supreme. Articles 3 and 4 read:


Sovereignty of the People

3. In the Republic of Sri Lanka sovereignty is in the people and is inalienable. Sovereignty includes the powers of government, fundamental rights and the franchise.


Exercise of Sovereignty

4. The Sovereignty of the People shall be exercised and enjoyed in the following manner:

a) the legislative power of the People shall be exercised by Parliament, consisting of elected representatives of the People and by the People at a Referendum;

b) the executive power of the People including the defence of Sri Lanka, shall be exercised by the President of the Republic elected by the People;

c) the judicial power of the People shall be exercised by Parliament through courts, tribunals and institutions created and established, or recognized, by the Constitution, or created and established by law, except in regard to matters relating to the privileges, immunities and powers of Parliament and of its Members, wherein the judicial power of the People may be exercised directly by Parliament according to law;lead-box-2-Arjuna-Mahendran-new

d) the fundamental rights which are by the Constitution declared and recognized shall be respected, secured and advanced by all the organs of government, and shall not be abridged, restricted or denied, save in the manner and to the extent hereinafter provided; and

e) the franchise shall be exercisable at the election of the President of the Republic and of the Members of Parliament, and at every Referendum by every citizen who has attained the age of eighteen years, and who being qualified to be an elector as hereinafter provided, has his name entered in the register of electors.

In practice, all 21 million or so of us cannot make decisions about management of the country and, therefore, we appoint “agents” via elections – the President and the Government. These agents appoint further “sub-agents” on our behalf. And, at least in theory, they are all bound by our Constitution to act in our interest at all times. 

In the process of governing, taxes are imposed and money borrowed by our agents and sub-agents to finance expenditures made on our behalf, hopefully for our benefit. Being the ultimate borrowers, we and our successors are responsible for settling these borrowings. Currently, each one of us has a share of approximately Rs. 450,000 of the national debt. 

The bone of contention is that these Sub-Agents are refusing to be accountable and provide information to the Principals about who they are borrowing from and at what interest rates. 

The figure shows the chain of command that applies to the process of the Treasury (Ministry of Finance) borrowing money on our behalf by issuing bills and bonds in the local market. 

The President appoints the Governor of the Central Bank of Sri Lanka (CBSL) based on the advice of the government Minister overseeing the CBSL. The Governor is the Chairman of the Monetary Board, the body responsible for governing the CBSL. According to its website:

“The Central Bank has two core objectives:

  • Maintaining economic and price stability
  • Maintaining financial system stability

with a view to encouraging and promoting the development of the productive resources of

Sri Lanka.”

However, the CBSL acts as an agent of the Ministry of Finance in issuing and managing Treasury Bills and Bonds. Obviously, keeping the interest cost to the Treasury as low as possible is a prime responsibility. 

The CBSL also manages the Employees Provident Fund (EPF) that consists of the savings of some of Sri Lanka’s working people – not the government’s own funds. The EPF’s website states:

“With a current asset base of Rs. 1,300 billion, the EPF is a little “Peace of Mind” for the employees of institutions and establishments of the Private Sector, State Sponsored Corporations, Statutory Boards and Private Business. The aim of the EPF is to assure financial stability to the employee in the winter of life and to reward the employee for his or her role in the economic growth of the country.” 



(Note: the asset base quoted is as at 2013. Currently it is around Rs. 1.6 trillion)

Over 90% of the EPF’s funds are invested in Treasury Bills and Bonds, by far the largest investor in this market. Obviously, it is in the interest of the members to obtain as high a return as possible on their savings. 

There is a clear conflict for the CBSL here since the Treasury wants interest rates to stay low whilst the EPF wants them high. The CBSL says that the EPF is managed by a department that has no contact with the Department of Public Debt (DPD) that handles Treasury securities transactions, but that does not seem to satisfy most detractors.

The CBSL appoints Primary Dealers granting them the exclusive right to bid at primary auctions of Treasury securities. They are effectively brokers who can deal for their own account or on behalf of others. Currently they are as seen in table 2.

In addition, the EPF is permitted to bid directly at primary auctions given their size and importance, although it is not officially a Primary Dealer.

The recent conflict that has been raging for a while now results from the suspicion that Perpetual Treasuries Ltd. (PT), a relatively tiny company owned by the family of CBSL Governor Arjuna Mahendran’s son-in-law, 

nhas access to advance confidential information about the decisions of the DPD (especially the actual amounts to be raised and the highest interest rate acceptable to the DPD)

nplaces and wins bids far in excess of its equity base, and at the highest rates, based on this illegal information 

Since February 2015, the DPD has frequently announced its borrowing requirement from an auction and then accepted many times that amount with the highest rate paid being much higher (of the order of 100-200 basis points) than the prevailing secondary market rates for similar bonds. The CBSL only publishes the aggregate amount of bonds issued and the weighted average rate paid, but not the individual transaction details or even the highest rate paid. 

In most cases, the secondary market rates revert to the level that prevailed prior to primary auctions within a few days. This shows very clearly that the primary auctions actually cause massive distortions in the bond market and the Treasury ends up paying much more than it needs to. In no reasonable bond market do long-dated government bonds fluctuate so much in such short periods.

There are also persistent rumours in the market that PT sells the bonds that they buy, within a few days, to various government entities in fraudulent deals that give the latter significantly lower interest returns. Further, the EPF, which is one of the prominent entities in this group, can instead bid directly at the auctions for its requirement instead of buying from Primary Dealers giving rise to allegations of illegal influence peddling.

In summary, what is suspected is that PT is effectively lending to the Treasury at inflated interest rates and then re-financing these loans by borrowing from the EPF and other government entities at significantly lower rates using inside information and undue influence. The losses of the Treasury and the EPF etc, constitute the ill-gotten gains of PT. 

All Treasury bond transactions, in the primary as well as the secondary markets, are captured in the CBSL’s computer systems, as are the related cash payments and receipts. All the data are thus readily available and all past transactions can also be reconstructed and examined without having to check files and follow paper trails. Disclosure is not an onerous task.

Rather than get bogged down with the technicalities of bond transactions, let us focus on the essence. These bonds are tradable promissory notes (i.e. promises to repay) issued by the Treasury as legal acknowledgement of straightforward debts. 

Any rational person would agree that we, the ultimate borrowers, should be entitled to know who we have borrowed from and at what interest rates, AFTER the transactions have been completed. However, in a letter to activist Chandra Jayaratne, the Secretary of the Monetary Board is reported to have stated that divulging such data “can cause serious prejudice to the economy of Sri Lanka by disclosing PREMATURELY decisions to change or continuing government economic or financial policies”. This kind of irrationality and blatant obfuscation only strengthen the suspicion that there is a cover-up going on. There is more.

The following exchange in a recent newspaper interview with the Governor is revealing (see - http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=145484): 

Q: These auctions were started for the sake of transparency. But now there are accusations of opaqueness in the auction system. Mr Chandra Jayaratne has written to the Monetary Board asking for the names of the primary dealers who bid at the auctions held this year, and the amount of bonds that had been sold by private primary dealers through the secondary market to institutions like the EPF, ETF, the Insurance Corporation and the state banks.

A: Nowhere in the world are the details of the primary auctions released to the public. That will lead to a lack of confidence in the market. These primary dealers have their own clients who want confidentiality. If I were a billionaire like George Soros, I wouldn’t want the whole world to know where I am investing my money. That is why we keep these details confidential. I am surprised that Mr Chandra Jayaratne with all his experience does not understand this. This is why I feel that there is a political ulterior motive in all these comments. I challenge Mr. Jayaratne or anybody else to show me a market that practices global standards of corporate governance where the details of dealers or brokers’ customers are revealed to the public. That simply does not happen. It is the curse of Sri Lanka that intellectuals are trying to get us to do things which are totally unfamiliar to any organised market in the world. You will immediately drive away the significant investors in our market by even suggesting this. So they are doing a national disservice by even making such suggestions 

Firstly, it is disingenuous of the Governor, as a professional rather than a politician, to cast irresponsible aspersions and try to draw red herrings about a “political ulterior motive”. 

Secondly, the reason why this has become an issue is precisely because the Monetary Board does not appear to employ even basic standards of corporate governance let alone “global standards”, or take obvious conflicts of interest seriously. Its members would do well to study the guidelines the CBSL has issued to all the banks that it supervises.

Thirdly, the request is for information about the transactions between the accredited Primary Dealers and State-owned institutions including the CBSL, not private clients.

Finally, practising more transparency and eliminating persistent and pervasive doubts about the integrity of the bond market will undoubtedly attract the kind of investors with whom the present yahapalanaya government has committed itself to doing business, rather than driving them away. We have to presume that the Governor is fully aligned with the backbone of this government – good governance.

To repeat, the transactions in question are not between two private parties. We, the people, are the borrowers and some of us are unknowingly the lenders too, with parasitic intermediaries probably cheating both sides. A conservative estimate of the illicit profits to these intermediaries runs into several BILLIONS of Rupees for adding no value whatsoever. 

These are not only despicable acts, they are illegal and those responsible could go to jail for them. A familiar recent example was Raj Rajaratnam in the USA. 

The members of the Monetary Board are also in the direct line of fire since they cannot even pretend to have been kept in the dark by CBSL minions with the very public furore lasting over a year now. They should heed the words of Thilak Karunaratne, Chairman of the SEC, the other financial market regulator, who recently spoke clearly and unambiguously about the importance of ethics in business and the market place. 

Our agents and sub-agents, like the Governor, should not arrogantly deny us information about our own indebtedness and its cost to us and our children. As committed citizens of this country, we have a right to this information to reassure ourselves that we are not being betrayed and swindled by servants of the State whose salaries we pay.


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