Gambling on good governance

Thursday, 23 June 2016 00:10 -     - {{hitsCtrl.values.hits}}

 Untitled-2Indi Samarajiva, Sri Lankan blogger and founder of the popular website, recently released a video that simplifies the Treasury bond scam in a most entertaining way. Titled ‘The Bond Game’ and featuring ‘Casino Centrale,’ the 007-themed video went viral, being the first simplified explanation in the public domain of a somewhat complex scandal that so far has been best understood Untitled-1mostly by the financial sector. 

The popularity of the video underscores the interest in the ‘question of the Governor’ in the wider populace, even when comprehension of the controversy is vague. It is remarkable that tuk-tuk drivers and vegetable vendors are suddenly talking about the ‘bandumkara’ debacle and its connection to a top official in the ruling administration. 

After 18 months in office, the alleged Treasury bond scam remains the single largest corruption scandal plaguing the Sirisena-Wickremesinghe coalition Government. And not even the technical complexity of the controversy has prevented understanding on the street that something has gone terribly wrong at the Central Bank of Sri Lanka. 

At 11:30 a.m. on Friday (17), a meeting had been scheduled between President Maithripala, Prime Minister Ranil Wickremesinghe and 19 civil society representatives including trade unionists, academics and anti-corruption activists. Several of these groups had strongly backed the ‘common candidacy’ platform that propelled President Sirisena to the presidency in January 2015.  Eighteen months down the road, these groups still wield influence over sections of the Government that believes civil society backing and mobilisation played a major role in its twin electoral successes of 2015. 

In the absence of Ven. Maduluwawe Sobitha Thero, the spiritual leader of the movement that propelled the current political dispensation into power, civil society has become the Government’s conscience call. And the loudest calls for the removal of Central Bank Governor Arjuna Mahendran when his term ends next week have emerged from civil society and good governance watchers. Friday’s meeting was specifically convened to give civil society activists an opportunity to make their case with regard to the reappointment of the Central Bank Governor.

Professor Sarath Wijesuriya, of Maduluwawe Sobitha Thero’s National Movement for Social Justice, spoke first. In his quiet style, he explained how the new Government was reneging on some of its promises on good governance which was seriously eroding public confidence in the Sirisena-Wickremesinghe administration. At the end of his 10-minute presentation, Prof. Wijesuriya said NMSJ and the wider civil society movement would not want to see Governor Mahendran reappointed for a further six-year term to head the Central Bank.

Dr. Gamini Viyangoda focused largely on the decision of the Presidential Secretariat to organise a foreign policy seminar earlier this month that provided Rajapaksa ideologue and former Ambassador Dr Dayan Jayatilleka a platform at which to attack the Foreign Minister and the Prime Minister while speaking directly to the President. He then addressed the issue of the Governor of the Central Bank. The respected academic and Convenor of Purawesi Balaya stopped short of accusing Mahendran directly of wrongdoing, but insisted that there was a loss of public faith in the official. Viyangoda said it was best Mahendran was replaced on 30 June, with an acting appointment.

Civil society representatives at the meeting expressed deep frustration over the fact that both Sirisena and Wickremesinghe reacted and interacted on every other issue the activists were raising, including corruption probes and tax increases, but steered clear of discussing the Central Bank Governor which was the reason for the meeting in the first place.

Executive Director of the Campaign for Free and Fair Elections (CaFFE) and advisor to the Anti-Corruption Front, Rajith Keerthi Tennakoon, used his turn to speak to bring the conversation back to the Governor. “We came here to talk about the Central Bank Governor, why are we talking about other things?” Tennakoon asked. He proceeded to detail reasons why Mahendran’s reappointment was problematic and would badly damage the Government’s credibility.

Prime Minister Wickremesinghe excused himself by 12:30 p.m. since he had to attend another meeting. Before he left, he promised the activists that a decision would be reached on the reappointment only after consultations with the President. Once the Premier left, the activists rounded on President Sirisena. “Tell us what your position on this is. You have opposed the Governor in the past. Are you likely to reappoint him on 30 June?” they asked the President. 

“It has been a long time since I said publicly that he was unsuited for the post. My position has not changed,” President Sirisena asserted. “Then don’t reappoint him,” the activists urged.

President Sirisena may not understand economic nuances, IMF conditions and the urgent requirement of tax regime reform. These are clearly the domain of his Prime Minister. But President Sirisena does have crucial political skills that the UNP is sadly lacking. He is able to gauge and react to the public mood.  

Activists who were in attendance said President Sirisena’s body language indicated extreme discomfort on the question of the Governor. On 14 June 2015, when President Sirisena made a special statement about the candidature of former President Mahinda Rajapaksa in the Parliamentary election, he also made a reference to this tension point within the Government.

“An allegation cropped up with regard to the Governor of the Central Bank. In my mind and in the public eye, there is a conceived notion that Mr. Ranil Wickremesinghe is not a thief. When the Central Bank Governor’s issue was discussed, I told him that he has a good name and in this instance too he should be doing the correct thing. I suggested that the best option was for the Central Bank Governor to resign,” the President said.

In effect, the statement was a vote of no confidence in Governor Mahendran by the Government’s Chief Executive. But it was a call that went unheeded and has consequently grievously wounded the ruling party, led by the UNF.

On Saturday, a day after meeting the duo, a smaller group of civil society activists met Prime Minister Wickremesinghe at Temple Trees. Among the group was Ratnapriya, who would go on to reveal a decision by the Premier on the reappointment of the Governor to the media. The meeting with Wickremesinghe lasted more than two hours. It was the third meeting civil society representatives had requested in the month of June, to discuss the Governor and other issues. At the end of that meeting, there appeared to be some concession emerging on Mahendran’s reappointment from the Prime Minister.

Ratnapriya told reporters that the Premier had agreed not to reappoint Mahendran until an investigation by the Committee on Public Enterprises (COPE) was completed. 

COPE, headed by JVP MP Sunil Handunetti, was trying to present an interim report to Parliament, but sources inside the Committee said the probe into the Central Bank had commenced too late in the year and could not be completed ahead of the 30 June deadline. Anti-corruption activists and reformers within the Government were hopeful that a strong COPE report would strengthen the case for the appointment of a new, untainted Governor. According to Ratnapriya’s version of the Premier’s decision, an acting appointment will be made until the COPE report is presented and if Mahendran is exonerated by COPE, the Government will appoint him to head the Central Bank once more.

However, former State bankers like Rusiripala Tennakoon point out that there is no provision in the Monetary Law Act for the appointment of an ‘acting’ Governor for the Central Bank. The only option, according to the law is for the Monetary Board to designate a Deputy Governor of the Central Bank as Senior Deputy Governor, who will then function as CEO of the banking regulator. If this transpires, Deputy Governor Dr P. Nandalal Weerasinghe who is the senior-most deputy governor at the Central Bank would be designated CEO. After Ratnapriya went public with Wickremesinghe’s decision, corruption watchdogs began to fear that the Government’s plan was to defer Mahendran’s reappointment until the pressure dies down, rather than find another candidate suitable for the post. 

Legal action

The concerns prompted the Anti-Corruption Front to file legal action against Governor Mahendran, pressing the Court to disqualify him from holding office. ACF’s Advisor Rajith Keerthi Tennakoon is seeking a Writ Quo Warranto setting out three serious allegations against Mahendran that Tennakoon says should disqualify him from holding office as Governor. 

In its petition, ACF argues that Arjuna Mahendran holding office as Governor of the Central Bank is ultra vires the Monetary Law Act No 37 of 1974 on the basis that he is a Singaporean citizen who cannot pledge allegiance to the Sri Lankan Constitution, his association with Credit Suisse, a financial institution from which the Government has decided to borrow money, and serious allegations of corruption and insider trading with regard to the February 2015 Treasury bond auction.

If the Court of Appeal grants Tennakoon, the petitioner, interim relief or issues the Writ, the question of Mahendran’s reappointment at the end of this month becomes redundant. If the Court rules for the ACF, Arjuna Mahendran will simply cease to hold office as Governor of the Central Bank. 

Double-edged sword

But the legal action is already a double-edged sword. A court ruling in favour of the anti-corruption activists will strike a major blow to the Government’s credibility and the campaign by the UNP in particular to stand by its appointee. Having allowed matters to escalate in this fashion, the UNF led coalition has no one to blame but itself for the potential embarrassment. If the Court of Appeal holds with the Governor and refuses to issue the Writ, the ruling will take the wind out of the sails of corruption activists and help the Government to validate Mahendran’s appointment.

The February 2015 Treasury Bond fiasco that shook the Government to its very core should have taught officials at the Central Bank at least one thing: to fix the loopholes and shortcomings that had given rise to allegations of ‘rigging’ and insider trading in its auction of Government Securities. 

Instead, lightning struck twice in the same place. 

On 29 March 2016, almost exactly 13 months after the first controversial Treasury bond auction, the Central Bank issued bonds to the tune of 77.5 billion, after initially offering Rs. 40 billion. In case of the longest tenor 14-year bonds, 29 billion rupees of bond were accepted after initially offering only 10 billion.

While details of winning bids in the auction have not been made public by the Central Bank, authoritative sources said Perpetual Treasuries, the firm connected to the Governor’s son-in-law had won a significant percentage of the bond issue, offered at different terms of maturity from four to 14 years. 

EPF controversy

According to documents detailing the 29 March 2016 auction, a purported data leak yet to be corroborated by the Central Bank, the Employees Provident Fund (EPF) did not bid in the auction at all. As the biggest holder of Government Securities, the EPF is allowed to place direct bids at Treasury bond auctions and do not have to go through primary dealers. Instead of bidding robustly at Central Bank auctions, over the past several months EPF has appeared to purchase the bulk of its securities in the secondary market, allowing primary dealers to make big profits from the higher value sales. 

Interestingly, a key Fund Manager at the EPF was closely associated with Perpetual Capital, the holding company of Perpetual Treasuries, during the tenure of the previous regime, when the EPF controversially invested in dubious equities trading on the Colombo Stock Exchange. That individual continues to function with increased protection from powerful sections of the current Government. So among the questions swirling around the March 2016 and February 2015 bond issues is why the EPF did not make bids, when over 90% of its investment portfolio comprises Treasury Bonds. 

Good governance activists like Chandra Jayaratne point out that the behaviour of the EPF is giving rise to suspicion of collusion between the EPF and primary dealers, which results in the Fund refraining from making credible bids and then purchasing those bonds in the secondary market, creating windfalls for primary dealers and losses for the beneficiaries of the EPF who are thousands of ordinary private sector workers. 

Governor Mahendran has defended the EPF decision to buy Treasury bonds on the secondary market, even at higher prices. But on the back of the EPF related controversy, the Monetary Board of the Central Bank, which is the legal authority which governs the Central Bank, recently announced that the EPF would actively participate in bond auctions– a tacit admission that the Fund managers had been negligent at recent sales of Government securities. 

The February 2015 auction

Economic experts explain that Treasury Bonds, essentially money lent to the Government, are sold through an auction process, where people bid at different rates and the bids with the lowest interest rates are accepted first. Bids with very high interest rates are rejected.

But when larger than announced volumes of bonds are sold, bids at very high interest rates have to be accepted. Dealers with inside information place bids at high rates and by virtue of being the only ones bidding at this volume are able to buy large percentages of the bonds being issued. 

According to the Central Bank Governor, who was interviewed on the subject of the 27 February 2015 bond issue on a private television network, the Government had informed him that it was in need of funds just before the auction. The communication from the Treasury, Governor Mahendran told the television channel, had come on Thursday, 26 February, while the auction had been announced that the Central Bank was accepting bids for a Treasury bond worth Rs. 1 billion on 25 February – Wednesday of the same week. Mahendran said they had no time to communicate this need to the primary dealers ahead of the auction. 

“When the Public Debt Department informed me that day that they had got Rs. 20 billion worth of orders, I then told them that the Government had indicated to me that they needed a large amount of money, so why don’t we take half of that – Rs. 10 billion. Accordingly the tender committee chose the lowest bids they could get to generate that Rs. 10 billion,” the Governor said during the interview.

However financial market analysts say when the Government has a sudden need for funds, the Treasury usually overdraws the Bank of Ceylon and sell short-term bonds to repay the bank later. What Perpetual Treasuries did was to effectively overdraw the Bank of Ceylon through contract known as a ‘swap’ and give the same money to the Government at a very high rate over 30 years. 

Prior knowledge?

In the Friday 27 February 2015 bond auction, most primary dealers bid small volumes, presuming it was a Rs. 1 billion bond that was on offer, as advertised by Central Bank. One primary dealer, Perpetual Treasuries, bid much larger volumes. By virtue of the number of bids Perpetual Treasuries alone had made independently and through another primary dealer – Bank of Ceylon – it won Rs. 5 billion or 50% of the volume offered in the 27 February 2015 bond auction. 

Although there is no written rule, dealers are generally expected to place bids of around 10% of the value of an issue. For an issue of Rs.1 billion, bids in the range of Rs.100 million would be expected from each dealer. If the Government, in its public announcements that all primary dealers were privy to, was only looking to raise Rs. 1 billion through its bond auction, what prompted Perpetual Treasuries to put forward a single bid worth Rs. 3 billion through the Bank of Ceylon? In essence, what did Perpetual Treasuries know that other primary dealers did not?

By his own admission, Governor Mahendran knew the Government was looking to raise more than the Rs. 1 billion advertised. There are countless other problems relating to the February 2015 bond auction. But fundamental to the conduct of the Central Bank Governor, purely on the basis that the primary dealer in question was connected to his son-in-law, is the question: Who else knew the Government was seeking to raise more than Rs. 1 billion – and 10 times more in fact? 

“Certainly they (Perpetual Treasuries) didn’t hear it from me,” Governor Mahendran insisted in the same interview, about how only some primary dealers had information to place larger bids. 

Arjuna Mahendran’s clear conflict of interest during a time when the State institution he is leading is embroiled in controversy over a dubious transaction involving a company linked to his son-in-law, is in and of itself, grounds for suspicion. The conflict of interest speaks to the fact that Mahendran should never have been the Government’s choice for Central Bank Governor, when it had spent years in Opposition highlighting transgressions by Perpetual Capital, and its deeply controversial involvement with the State financial sector, the EPF, the Central Bank and the Colombo Stock Exchange. 

Waning support

Over the past month, even within the UNP, support has been waning for the Governor of the Central Bank. Reformists within the Government are pushing back against the reappointment of Arjuna Mahendran. On the question of the Governor, many UNP ministers and deputy ministers stand with President Sirisena, a fact the latter knows all too well. 

All these months it appeared Prime Minister Wickremesinghe, who could not have missed growing public opposition to Mahendran, was setting great store by loyalty. Mahendran after all, had been called to service by the Premier, and close associates said he felt duty bound to stand by his pick for Governor, and furthermore has remained convinced of his innocence. Loyalty matters in politics, but that is all the more reason Governor Mahendran should have provided the Prime Minister with a face-saving way out of the crisis a long time ago. 

A great deal of damage to the Government’s credibility, especially with regard to its commitment to fight corruption and cronyism endemic to Sri Lanka’s political culture, was easily avoided if Governor Mahendran had bowed to public pressure and stepped aside, or if the UNP had acted decisively to try and exonerate the Governor through a credible investigation over the past 16 months. 

With the exception of appointing a three-man commission to probe the alleged bond scam whose report was inconclusive, the Government chose apathy, inaction and a callous disregard for the growing public outcry against the Central Bank Governor. Now that pressure has become too powerful to withstand, and turned the Governor’s appointment into an acid test of the ‘Yahapalanaya’ coalition’s commitment to its stated ideals.

The power to end it all was in the Governor’s own hands. When pressure was mounting against his reappointment, he could have made a public announcement earlier this month that he was unavailable to be considered for a further six-year term, thereby sparing the Government the embarrassment of being forced to replace him.

Government insiders say there is still room for the Governor to execute this move, but now it will only seem as if Arjuna Mahendran, like the Government that appointed him, was finally being forced to bow to the people’s will. Mahendran’s conduct was drawn into sharp contrast this week, when India’s central bank Governor Raghuram Rajan announced that he would not be seeking a second term in office after Subramanian Swamy, a BJP lawmaker attacked him for his hawkish stance on interest rates and questioned if Rajan was “mentally, fully Indian as he holds a U.S. green card,”. With Rajan’s exit from the Reserve Bank of India, Nobel Prize winning Economist Amartya Sen said India was losing one of the most skilful financial economic thinkers in the world. It took only a single word from an associate of the Prime Minister of India to prompt Rajan to step down. In Sri Lanka’s own Central Bank crisis, 16 months after the alleged bond scam and a year since President Sirisena expressed a lack of confidence in the Governor, credible signs of an impending graceful exit are yet to materialise.

In the event of Mahendran’s departure from the Central Bank, the Government’s more progressive ministers and officials insist that the next candidate for the high office could be a short-term appointment, but must have basic knowledge of monetary policy but also crucially, capacity to rebuild an institution that has been severely compromised over the past decade. A non-aligned Governor, who can remain independent on key regulatory and financial questions especially at critical times, will be the most desirable option, these Government insiders say. But whether the political leadership will gamble on its political fortunes and risk losing influence within the regulatory institution by appointing an independent governor to lead the Central Bank remains to be seen.


An earlier version of this article referred to Deputy Governor P. Samarasiri as the senior most deputy governor serving at the Central Bank of Sri Lanka. This is a factual error, as Dr. P. Nandalal Weerasinghe is the most senior deputy governor, promoted to that position on 27 September, 2011, while Deputy Governor P. Samarasiri was promoted on 14 July, 2014. The article has been altered to reflect this correction. We regret the error.  

Recent columns