The ‘special statement’ on the bond commission report made last Wednesday by President Maithripala Sirisena was, all things considered, the only statement that could have been made in the circumstances. To have expected anything else was unrealistic. The yahapalana project is something that goes beyond the President, the SLFP which he controls, and the UNP which is in an uneasy alliance with him. This is a project with many stakeholders both local and foreign and it is not easy for any one partner in the yahapalana coalition to make arbitrary decisions even if his personal political future depends on it. The rhetoric of SLFP Ministers during the hearings of the bond commission and while its final report was pending was such that the expectation created in the country was that the President will go all out against the UNP once the report is out. SLFP ministers probably salivated at the prospect of being able to do the UNP in and win a larger slice of the yahapalana vote.
However, all that fell by the wayside with the President’s tepid statement on the bond commission report. For months members of the JO, SLFP and JVP had been vying with one another to portray all those even remotely involved in the bond matter as rogues and the bond issues themselves as the biggest frauds ever perpetrated in this country or even the South Asia, Asia and even the whole world. SLFP State Minister Lakshman Yapa Abeywardene went on record saying that the loss from the bond scam was over one trillion rupees. When he was questioned about this figure he told reporters, “Trust me, I was in the banking sector once, the loss is over one trillion rupees.” One of the most outspoken SLFP figures in this regard was Minister Susil Premajayantha who explained all the cloak and dagger stuff that went into the bond transactions in dramatic detail in parliament.
After months of such posturing, the President’s special statement on the final report of the bond commission was a damp squib to say the least. One thing that this showed was that there is an obvious mismatch between what the President is prepared to do to improve the SLFP’s prospects and what the SLFP ministers and MPs in the government thinks should be done to improve the prospects of the party. This mismatch largely stems from the fact that the SLFP President was voted in by a largely UNP voter base while all his followers in the SLFP government group were elected on the SLFP vote – a vote base that was opposed to everything that the yahapalana government stood for. So the SLFP ministers always sought to pander to their base by attacking the UNP at every opportunity they got. The President too allowed this to happen probably because he was trying to build a party base apart from the UNP.
But now, all that has come a cropper with the President’s statement which had the effect of sweeping the bond commission under the carpet. All that has happened is that the President has sent the bond commission report to the Attorney General for further action. The Prime Minister pointed out in a subsequent statement that he too had sent parliamentarian Sunil Handunneththi’s COPE committee report on the bond commission to the AG back in 2016. What the people actually expected were things like dramatic arrests and highly publicized prosecutions with those involved in the bond scam being brought to court in handcuffs. What people saw over the past three years is members of the opposition being arrested and carted off to jail on the flimsiest grounds. Former Minister Basil Rajapaksa was arrested and kept in remand for months under the wrong law for the wrong reason and the magistrate’s court was kept open till midnight especially to remand him. This mind you was for authorizing the payment of Rs. 2,500 to each Divineguma family without even the suggestion that he had pocketed any money himself. In contrast to that, the bond scam had according to Minister Lakshaman Yapa Abeywardene cost the country over a trillion rupees all of which has gone straight into the pockets of the scammers.
One law for the JO, another for the UNP
The difference in treatment meted out to the bond scammers and the members of the previous government could not be starker. In fact the allegations against members of the previous government were just allegations whereas the bond commission carried out a thorough investigation with clear evidence of wrongdoing emerging. The SLFP was the first to call for a parliamentary debate on the bond report obviously to try and salvage what is left of their self-respect. The UNP us going to be torn to shreds at this parliamentary debate by the Joint Opposition, the SLFP and the JVP. But the SLFP will also get mauled on the process for failing to take action against the bond scammers the way they have against members of the JO even over petty allegations like the possession of more than one passport. In these circumstances, the Podujana Peramuna should thank its lucky stars that the negotiations for the Joint Opposition and the SLFP to field a joint list at the forthcoming local government elections fell through.
Had that move succeeded and the Joint Opposition was in a partnership with the SLFP, the JO too would have ended up with egg on their faces following the President’s anticlimactic statement on the bond scam. The Podujana Peramuna would not be able to go before the people and claim that they were against the UNP being let off so lightly when they were in an alliance with the SLFP. The situation that has arisen after President Sirisena’s special statement once again highlights why the government should be the government and the opposition should be the opposition and the twain should never meet – not in an electoral alliance anyway. What this shows is that the SLFP finally has no control over the decisions made by its leader. The SLFP campaign is in tatters. Any hope they had of being able to masquerade as a part of the opposition while being a partner in the government ended last Wednesday. To make things worse, members of the SLFP were forced to defend the UNP Prime Minister at the SLFP press conferences that followed the President’s statement saying that the Commission has not found fault with the Prime Minister.
Now the JO and the JVP are accusing the government of sacrificing a few people like Ravi Karunanayake in order to shield the main suspects. Perhaps the Commission may not have found fault with the PM, but it was not only the PM who was questioned by the Commission. There were dozens of other officials up and down the line and for months, sensational revelations were being made about the manner in which the Employee’s Provident Find had been milked and corrupt officials paid kickbacks. Many laymen who are not familiar with the tortuous process of the law would think that if Basil Rajapaksa could be arrested on what appeared to be trumped up charges, the issuance of the bond commission report world result in the arrest of at least some of those officials who were revealed to have given and received bribes in relation to the sale of these bonds. The obvious reason why no such arrests have been made is due to the fear of what those officials may reveal if they feel that they are being sacrificed to save someone else’s skin.
The appointment of this bond commission was a mistake from the beginning. This was a case of one segment of the government appointing a commission to look into the doings of another segment of the same government – indeed the senior partner in the government. In hindsight, this was bound to fail from the start. It was no less a personality than the Ven. Bellanwila Wimalarathana Thera who stated cynically that appointing a commission is a way of shoving an inconvenient matter under the carpet. The Ven. monk made that prescient comment at a time when the proceedings of the commission were making headlines virtually on a daily basis and hopes had been raised that some result may actually come of it. This writer too had been warning from time to time that Arjuna Mahendran was a UNP insider who was privy to all the secret deals that were hatched with regard to the yahapalana conspiracy and that it was probably at his house in Singapore that members of the Rajapaksa government had finalized their deals to join the other side and therefore, sacrificing him to save the government will not be feasible. Finally, that is where things seem to have ended up.
On Friday, a magistrate issued an open warrant for the arrest of Jaliya Wickremasuriya the former Sri Lankan Ambassador to the USA. No allegation against Wickremasuriya can compare with the sensational revelations that came to light during the hearings of the bond commission. The question on most people’s minds is, if action has been initiated into some obscure matter that Jaliya Wickremasuriya is said to be responsible for, then how come no action has been taken with regard to some of the matters that came to light during the bond commission hearings which can be immediately acted upon without waiting for the commission to conclude its sittings? Last Friday’s editorial in The Island observed as follows:
“We waited, with bated breath, for a pulse-pounding, earth-shattering revelation on Wednesday. But, President Maithripala Sirisena only read out a statement, selectively disclosing some of the recommendations made by the Presidential Commission of Inquiry (PCoI), which probed the Treasury bond scams. However, he, credit where credit is due, has at least done that much unlike his immediate predecessor, Mahinda Rajapaksa, who swallowed presidential probe committee reports whole and flashed grins like a Cheshire cat….A sine qua non of ensuring the success of the forensic audit, recommended by the PCoI, is to prevent the desperate racketeers from covering their tracks and trying to derail investigations. Let President Sirisena be urged to take over the CBSL immediately. A few moons ago, we reported that CBSL Deputy Governor P. Samarasiri, bracketed with Mahendran in the PCoI report, had removed a whole slew of files from the bank and security officers had been ordered not to stop him. The President must act fast if he is genuinely desirous of making the bond racketeers and their confederates in the CBSL pay for the biggest ever financial crime in the country. It is the moment of truth for the President, who wears his commitment to good governance on his sleeve. Now that he has talked the talk so eloquently, he has to walk the walk.”
Dispute over the actual loss caused by bond scam
The dissection of the contents of the bond commission report as revealed by the President in his special statement has commenced already. What is being challenged in the first instance is the bond commission’s calculation of the loss to the country as a result of the bond scam which the commission says was in the range of Rs. 11 billion. On Friday, the former SEC Chairman Nalaka Godahewa was furiously contesting the commission’s calculations stating that this is no ordinary scam (horakama) but one that has affected the whole country and added to the cost of living of every citizen. He asserted that Rs. 11 billion is just the profit made by Perpetual Treasuries in one year through the bond scam and that there are other factors to be taken into account such as the increase in the interest rates by about three percentage points. The loss to the government resulting from the interest rate increase alone is in the range of Rs. 126 billion. Further, he pointed out that as a result of the flight of foreign money from the bond market following this scam and other reasons, the value of the rupee depreciated by about 16% which resulted in the increase of the government foreign debt by about Rs 512 billion. As a result of the increase in the interest rates, the debt of companies and individuals had increased by about Rs. 280 billion. Thus the actual direct and indirect loss to the government and the people of Sri Lanka from the bond scam is over one trillion rupees.
Godahewa accused the government of trying to cover up the bond scam and he drew the attention of the public to the manner in which the President dissolved parliament when D.E.W.Gunasekera was about to present the first COPE Committee report on the bond scam to the last Parliament and the manner in which the Auditor General had been summoned by the Prime Minister to be told that the AG was calculating the loss from the bond scam in the wrong manner. He also reminded the public of the manner in which the UNP tried to move court to prevent the release of the first COPE committee report and the manner in which UNP State Minister Sujeewa Senasinghe wrote a book stating that no fraud had taken place at the bond auctions, and the manner in which a group of parliamentarians added footnotes to the second COPE report to make the same assertion. The present writer interviewed Arjuna Mahendran just before he completed his term in office as CB Governor in June 2016 and one of the questions that I specifically asked him related to the question of interest rates. What follows are some excerpts from that interview.
In Arjuna Mahendran’s own words…
The Island: Aren’t all these problems due to the fact that you started going in for bond auctions instead of direct placements as was the earlier practice?
Arjuna Mahendran: In the modern economy the government can’t manipulate market prices. One of the issues that I took up after I became Governor was that the determination of interest rates had not been left to market forces. It was being done administratively by the people in the Central bank. The rate of interest should be determined at an auction. That is the way it is done everywhere in the world. The members of the previous regime say that the interest rates under that previous system were lower than at the auctions. But that is beside the point. My critics are accusing me of arbitrarily raising interest rates whereas the whole purpose of having auctions is to determine at what price the market will provide those funds to the government. The government had to borrow vast amounts of money to pay the salary increases that were announced, both by Mahinda Rajapaksa and subsequently by President Maithripala Sirisena’s government. In the past they were using the EPF, the Insurance Corporation and the state banks to fund the government’s borrowing and artificially set interest rates at whatever level they wanted to. The problem with that system is that firstly, the EPF contributors were being short-changed. They can get a much better rate of interest for their investments if there is an auction. Secondly, the banks who should be lending this money to private borrowers were instead lending that money to the government.
Q. You have told COPE that you introduced auctions to attract more money to the government and that you wanted to avoid going for a Sovereign bond issue and to generate more money locally so as to reduce our dependence on foreign borrowing. But when the interest rate goes up that creates a whole raft of problems. It increases the government’s debt burden and dampens private borrowing leading to a slowing of the economy.
A. Private borrowing has not gone down so far. At the moment private borrowing is growing at 25%. Increases in interest rates have done nothing to reduce private borrowing. On the contrary we are worried that private borrowing is too high and that is why we are tightening up.
Q. What about the fact that the rising interest rate increases the debt burden on the government?
A. The point is that if the government is to pay higher salaries it has to get the money from somewhere. I increased the size of the auctions. Earlier auctions were for one billion and amounts like that. I made it 10 billion and we immediately got the money. There is enough money in Sri Lanka. All I did was to get it from the public, instead of robbing the EPF, the state banks and the Insurance Corporation.
Q. You have referred to an ‘explosion’ in government spending which made it necessary to attract more money into the system. You have, in particular, mentioned the mini-budget in January last year at the COPE inquiry.
A. President Mahinda Rajapaksa also announced an increase in public sector wages in the 2015 budget.
Q. But not to the same magnitude.
A. You can argue the point. But, since the announcement of the presidential election in 2014, there was a ramping up of government spending and there was a cut in the price of petroleum products. The previous CB Governor had left a 500 million USD bond to be repaid in February 2015. We didn’t have enough money to pay that and I had to reach out to the Reserve Bank of India and borrow some money. We were in a parlous situation where the bills were accumulating. The immediate reason why we went for that big auction at the end of February 2015 is that the RDA had informed the cabinet sub-committee that they needed Rs. 75 billion. That is why I went to the Public Debt department on the day of the auction and asked how much we could raise because the government needed more money. They said there was 10 billion available even though we had advertised only for Rs. one billion. So I said take the whole 10 billion. The interest rate we advertised was 12.5%. We didn’t pay anything more than we had advertised.
Q. Why was a direct placement system not feasible among institutions that need such long term investments?
A. Because we don’t want to deprive the private pension funds of access to these bonds. The EPF has to compete with private pension funds and other fund managers in the market for this money.
Q. Couldn’t these bonds have been placed with the private pension funds as well the same way they were placed with the EPF and ETF?
A. Then there is no point in having a market. We can’t go back to a Soviet Union style planned economy. Even the interest rate has to be market determined. Otherwise, we will have a shortage of money in the country.
Q. There is also this issue of institutions like the EPF, ETF, the Insurance Corporation and the government banks having to buy these bonds on the secondary market from private primary dealers. There is the allegation that the interest rates on long term bonds are being pumped and dumped on these institutional investors.
A. Any allegation of pumping and dumping has to be proved. There is no evidence of collusion in the market. As I said the bidding system is purely electronic. There is no way people can collude and fix this. There are about 15 primary dealers who are bidding every day including the EPF. The EPF has to see to it that they get what is required. If they can’t do that then they have to go to the secondary market and buy these bonds. No other country allows institutions like the EPF to bid in the primary market. Normally, primary auctions are only open to primary dealers. But, as an exception we have allowed the EPF to be there. The EPF gets money on a daily basis from their contributors. If they keep this money in a fixed deposit they will get only 6% whereas if they buy a bond in the secondary market they will get around 8, 9 or 10%. They buy bonds in the secondary market because they can’t wait for the next auction which may be two weeks away.