By Hema Senanayake –
I wrote this letter before you ordered to attack unarmed citizens at Gall Face protest site. However, I submit it as it is.
One of my friends and I had a discussion about you recently. He is an engineer in USA with having a Ph.D. Usually for engineers everything is mathematics. He said that ego of senior Sri Lankan politicians, is inversely related to knowledge. This means with the age if they do not acquire knowledge, ego increases; and if they acquire new knowledge, ego decreases. This was happened to your predecessor Gotabaya Rajapaks. Once he said that what he says is the “circular” meaning it was the rule of governance.
In the very first month of your “Good Governance Government” you had the same “syndrome.” It was documented in the very first Board Paper of the Monetary Board which govern the Central Bank of Sri Lanka (CBSL). It led to the infamous “Bond Scandal” that happened in February 2015. You listened to a storyteller and made your opinion to appoint him as the Governor of CBSL even though a few Cabinet Colleagues opposed to it. It may be a point that your ego was high.
From the minutes of the above said Board Paper, we can now imagine what led to your decision of appointing Arjuna Mahendran as the governor of CBSL. We just can imagine it from circumstantial evidence. But it is you who knows what actually happened in making that decision to appoint him. It was a colossal mistake, and please do not do similar mistakes now.
I quote below the appropriate section from the Board Paper submitted to the Board Meeting held on February 23, 2015.
“The Board was of the view that issuing 30-year Treasury bonds would be favorable at this stage to extend the yield curve and re-profile the debt service as there is good interest shown by foreign investors. Accordingly, the Board instructed the Superintendent of Public Debt to conduct a 30-year Treasury bond auction during the week and arrange to list sovereign bonds in Euro Clear Exchange in future.” (Emphasis is from me). Interesting. Isn’t it? Now, let me show you how you were misled.
The target of the bond issue was foreign investors. If foreign buyers bought bonds, dollars would flow inward. It is a good thing as it helps Balance of Payment position and to increase foreign reserve levels. Now think that these rupee denominated bonds for 30 years are listed in Wall Street Stock Exchange or somewhere what would happen. Investors around the world would rush in and purchase our bonds in dollars and resultant effect is that dollars would flow into our country. What a great thing and an innovative idea. This is not my idea Mr. President; this was what Arjuna told you before he got his appointment. He identified “Euro Clear Exchange”, instead of Wall Street, that is why the Board instructed the Superintendent of Public Debt to “list sovereign bonds in Euro Clear Exchange in future.” Has the Superintendent of Public Debt ever listed those bonds in “Euro Clear Exchange?” Never. If this was happened Arjuna would have been a hero today. But it was a fantasy. Not only you Sir, but the then Monetary Board too would have been likened fantasies, or they just surrendered to the best buddy of you.
Not only this. You interfered in another policy of central banking in early 2015, perhaps your ego was high at that time because according to our equation ego is high when knowledge does not increase. You advised the governor of CBSL Arjuna Mahendran to cancel private placement when issuing bonds. To ensure transparency you advised that all bond issues must be through public auctions only. It is a sexy policy. In the U.S. when some policy is too exiting it is known as ‘sexy’ policy. Your advice was too exiting. Arjuna did it. Monetary Board went meekly. But within months CBSL had to cancel that policy.
As you may aware, there are some entities known as Primary Dealers. Sixteen of them were in existence at that time. When CBSL wants to issue bonds, they write to Primary Dealers to submit their quotes to purchase a certain number of bonds to be issued. This is known as private placement, no advertising, just an email. When Primary Dealers offered to purchase the bonds say Rs. 1 billion, CBSL would know the liquidity position of the monetary system from the volume of subscription and the interest rate sought by the dealers. Thereafter CBSL makes a public bond issue with an indicative interest rate. This public issue is not a public issue in real sense. Again, only the Primary Dealers can submit offers. If people want to buy bonds, they must go through Primary Dealers. By advising the governor of CBSL to stop private placement, you Mr. President cancelled the liquidity assessment run by CBSL before a bigger bond issue. However, within months CBSL abandoned your advice, they carried out private placements again.
As you may understand from the above, I do not have the full trust in Monetary Board. They mostly bend to the views of higher political authorities. Still, Mr. President, do not interfere into monetary policies, just listening to fantasies. If you want to interfere, I agree it is something necessary for a President, please do that by having a ‘public hearing.’ Specially, listen to the rationale of opposing views.
Why, I remind all these now? Because I know, you in your previous administration promoted the idea of “Independent Central Banking.” Another sexy idea which is sometimes advocated by IMF and also, by the Foreign Relation Committee of the Senate of the U.S. Your, previous administration drafted an amendment to the Monetary Act regarding it. Dr. Indrajith Coomaraswamy (a person I respect mostly) former governor of CBSL recently defended it saying that if the amendment had been enacted, Gotabaya Rajapaks could not have been reduced taxes which reduction of taxes is identified as a main culprit for current economic crisis. The argument flows as follows.
The proposed amendment prohibits the purchase of treasury bonds directly. This means if the proposed amendment to the Monetary Act was enacted, the CBSL can purchase treasury bonds only from the market to execute the monetary policy. Again, this means if the amendment was ratified by the Parliament as a law, President Gotabaya Rajapaksa’s government could not reduce taxes due to the loss of revenue cannot be met by selling of Treasuries to the CBSL directly. But this is not a good argument or good reason to justify the passing of proposed amendment, because taxation is a structural policy adjustment to be made to ensure the production of common interests in a society from the deprived distributable (or consumable) output to consumers. In turn consumers are benefitted when common interests are produced. This has nothing to do with the execution of monetary policy which helps to construct the essential monetary infrastructure upon which market mechanism functions efficiently, ensuring a stable currency that penetrates into every produce to reveal its relative value so as to exchange in the market. Without this market mechanism fails, as is happening now. This is a complex mechanism, but what is true is that you Mr. President must understand that no efficient central banking is possible without the strong backing of a taxation authority which means the Treasury. Therefore, independence of the Central Bank must mean that there is no undue influence on its Board and to the governor of CBSL. Let the Board members and central bank officials come before a parliamentary oversight committee regularly to explain the rationality and effect of their decisions made. Let other professionals outside parliament assist in oversight committees. Let the knowledge level go up and ego decreases.