By Hema Senanayake –
Hema Senanayake
I am not a mathematician. But I still admit that mathematics is the apex of all sciences including “economic science.” Without mathematics I cannot imagine what kind of civilization this could be. Perhaps, Prime Minister Ranil Wickeramasinghe could better explain about it.
Now, Mr. Gamini Wijesinghe, the Auditor General submitted a certain calculation based on a certain mathematical principle. He said that if the Central Bank accepts bids to buy government bonds quoted with higher interest rates than prevailing market rates, the government would make a real loss by having to pay higher interest. This is not a nominal loss. This loss can be nominal only if the payment of interest is nominal. But the payment of interest by the government is real. Receiving of interest payments by the bond dealer is real too. There is nothing nominal in this kind of deals.
Subjected to the above mentioned principle, as far as I know, Auditor General calculated the loss to be made by the government by having to incur extra cost on interest as a result of accepting at least Rs. Five billion worth of bonds with higher interest rates maturing at 30 years, offered by Perpetual Treasuries at the bond auction held on February 27, 2015. His calculation of loss amounts Rs.1.6 billion. The loss made by the government by having to pay higher interest rate can be calculated – And nobody can challenge about it. Let me give you a very practical example. 
I wanted to buy a car. After making a down payment I needed a loan to buy it. The loan amount needed was $26,000/=. Financial consultant of the car dealers company requested from a few financial institution to submit their quotes to borrow $26,000/= to be paid back in full in 60 monthly installments. One bank quoted to lend the amount at 11% interest per annum and another bank quoted with 4.6% interest rate. If I had borrowed from the first bank I would have ended up paying $ 7,918/= as interest by the time I settle the loan in full. If I had borrowed the same amount at 4.6% rate, my total cost of interest for 60 months would be $3,154/=. Would I have had made a loss of $4,764/= ($7,918-$3154) if I had borrowed at 11%? The answer is yes.
This same calculation is applicable in calculating the loss made by the government in borrowing by having to pay higher interest for Perpetual Treasuries. The only difference is that the calculation is a little bit complex because basically there are two variables involve in the calculation. One variable is the purchase price of a bond of Rs.100 and the other is the quoted interest rate. For an example one Primary Dealer offered to buy 50 million bonds worth of Rs.100 each at a purchase price of Rs.112.01 each. This means that the Central Bank receives Rs. 5,600.01 million and this exceeds Rs.600.01 million than the par value of bonds when the offer is accepted. The yield rate (interest rate) quoted was 9.99%. This has additional benefit because in general the interest rate is paid to the par value of bonds. This simply means that even though the company invested Rs. 5,600.01 million in buying bonds, the company has agreed to receive interest income for Rs.5,000 million only. It means that the effective rate of interest is less than the 9.99% in this example and this is a real example.
The exact opposite happens if a Primary Dealer quotes the purchase price below Rs.100 and quotes higher interest rate. I am going to give you another real example. The Bank of Ceylon on behalf of Perpetual Treasuries offered to buy 3000 million bonds worth Rs.100 each at a purchase price of Rs.90.16 with a yield rate of 12.5% and the bid was accepted. In this case the Central Bank receives Rs.270,480/= million instead of Rs.300,000/= million by issuing 3000 million of bonds. But the interest is paid not on the money received but on the actual or the par value of the bonds. This means even though the company invested Rs.270,480/= million in buying 3000 million bonds, the government pays interest for Rs.300,000 million which is the par value of the bonds issued. As a result the effective rate of interest might be gone up to 13.86% in this case. Both above examples are true cases and data was extracted from the Pitipana Committee Report in regard to the bonds issued on February 27, 2015.
In the first example, the government receives more money than the par value of bonds and the effective rate of interest is less than the quoted yield rate. In the second example, the government receives less money than the par value of bonds issued and the effective rate of interest is higher than the quoted yield rate. So, who can argue that the loss cannot be calculated? There is no argument that the comparative loss can be calculated. If anybody argues that the loss to the government cannot be calculated by having to pay higher interest rate in issuing bonds, he or she is not fit to be a Cabinet Minister who oversees the Central Bank.
I still remember the speech made by the Prime Minister in parliament in March or April of 2015 when MPs demanded an investigation in regard to the bond scam took place on February 27, 2015 when Arjuna Mahendran was the governor of the Bank. He questioned the assembly as to who knows about bonds and further commented that parliamentarians only know about James Bond. This sheer sarcasm should not come from the Prime Minister. However, he would not have uttered those words if he was familiar with a very enlightening quote attributed to Werner S Heisenberg who was the pioneer of modern quantum mechanics. He won the Noble Price in 1933. I quote bellow what he said:
“If a person cannot explain quantum mechanics to a barmaid then that person does not know what quantum mechanics is.” From this what he intimated was that any serious subject can be truly simplified if the person knows it thoroughly. The subject of bonds is nothing in compared to quantum mechanics. If any person suggests that you can’t understand it, then that means he himself knows nothing about it.
(Note: Unfortunately I could not find the exact reference of Heisenberg’s quote. I am sorry about it. Even without a proper reference the message it delivers is truly great.)
Amarasiri / October 22, 2016
Hema Senanayake
RE: COPE Report Is Due Soon: Is Ranil’s Credibility At Stake?
Should wait for the COPE report to be released before Ranil W is given the Honorary title of Gon or Hon.
Sirisena has already earned it, and he is Gon Sirisena Gamarala.
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Don Stanley / October 22, 2016
Why is Cope delaying and delaying release of this report?!
Are they so unprofessional?
This has gone on long enough and the report must be released immediately.
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Dinuk / October 22, 2016
Thanks for this article! Someone should leak the cope report.
Treasury bonds and interest payments are NOT rocket science and Ranil’s attempt to pretend otherwise is because he is guilty of corruption and rent seeking and should be impeached for corruption and also trying to cover it up. Dilma Russef of Brazil was impeached for similar scams.
That the same corruption and rent-seeking was done by Mahinda Jarapassa’s criminal clown who ran the Central Bank – Ajith Nivard Cabraal does not make the bond scam legal. Nivard Cabraal and Mahendran need to be tried in open court with Aloysisu who worked with BOTH of them.
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words / October 22, 2016
Ranil ain’t far behind Sira, if today’s morning reports on the COPE findings is anything to go by.
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jim softy / October 22, 2016
The trade mark of Sri lanka politicians is what ever happens they never resign or they never admit they screwed it up. Even if they were caught robbing the country and if they were taking to jail, they would raise their hands and show off the hand-cuffs to show how great it is to be in the jail. Similar people who thinks that they must go to jail, if not they are not real men are supposed to live Harlem, New york.
The central bank scandle happened with Ranil’s advanced knowledge. But, no one will ever admit it. Stealing public money for election purposes is the way for major political parties of Sri lanka. The route for individual politicians are political donations, tax free car permits and contract – commissions.
So, NGOs should ask the govt to change way how funds are collected and spent for political parties. Collecting funds by individual politicians should be banned.
Central bank losing Rs FIVE billion is highway robbery. Central bank lost that money because, it is the Central bank and BOC made way for that Bond leader to make money without having any funds.
Just think, if that money was given to a govt bank, it would be public money.
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Serious Sira / October 22, 2016
Not at stake! it’s kaput. I watched Pathikada with Bandula Jayasekera and he clearly said and we too noticed that Mr. Clean is no longer clean but dirtier than a soil diaper. I still cannot imagine why he got involved in this dirty deal.
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Buster / October 22, 2016
SS – “Politicians are like diapers… they should be changed often … and for the same reasons”. (Mark Twain)
“Most are full of shit. Those that are not yet, will be if they stay in power long enough. Power corrupts. Absolute power corrupts absolutely.”
The addition to Twain’s quote is in an article by Corey Wayne.
In case CT decides to publish the link to this, it is: https://understandingrelationships.com/why-politicians-are-like-diapers/7057
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Sunimal Chandrasiri / October 22, 2016
At the particular Bond auction if I remember correct Rs. 01 bn worth bonds were on offer but 10 bn was raised as the estimate for fund requirement was later found to be higher than the initial estimate.So the options available were (i)to raise 01 bn through auction and the balance through direct placement (mostly by EPF,ETF as the practice has been- I gather, at the of established rate at the auction )or (ii)raise 10bn through the auction at the quoted rates ( that is extra 9bn at quoted higher rates). So the issue here is that Central Bank has to pay higher interest for the extra 9bn raised at the auction. Can the author please explain to me whether 9bn had been raised at a higher interest when funds at a lower interest were available at the auction.I am a layman but if that had happen, it surely is a wrong thing.But it appears that when raising 10bn the lowest quoted up to that limit had been selected.And the Central Bank (that is in effect all Sri Lankans) has to pay a bit higher interest for the extra 9bn The alternative would have been to raise that 9bn through direct placement mostly by captured funds like EPF,ETF. Then instead of the Central Bank paying higher , the members of the EPF and ETF would have lost an amount equal to what Central Bank would have paid extra, for EPF & ETF menbers would have got less for their money. Being a member of ETF & EPF ,I prefer the Central Bank ( that is all Sri Lankans) to pay the extra amount rather than only the segment of the population who are EPF & ETF members pay it. Can the author or any learned person on the subject please explain whether my interpretation is wrong as I am a layman trying to figure out what all this issue is about.
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Silva / October 22, 2016
Sunimal Chandrasiri,
Don’t worry! They will never answer your question. Because, had they done that the very existence of COPE kolama would have been ended months before becuase this is the only thing that is sustaining the empty ranters like Handunnetti and the Rajapaksha vassals. Also 95% of the media vassals of the Rajapaksha would have starved without news to sustain moron-attraction.
What I gather from this whole fiasco is that Perpetual has gone scot free looting public money through a loophole the Central Bank and the Government themselves have created. The [Edited out] Auditor General failed to observe this loophole. He is now jumping up and down after everything is over! The only viable solution is, provided this story of lending government its own funds obtained at lower int rates through CB is true, to recover the loss from the profit of Perpetual through a special law created in the parliament.
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Adrian / October 22, 2016
The loss is caused by the leaders who has the power to prevent such losses. They have caused unjust loss to the people, therefore should be held responsible for crime at a later date.A
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sacre blieu / October 22, 2016
The basic principals of a government servant, and a senior one at that, has been violated as in the case of the central bank, where the governor has had a hand in this bond fiasco. Honesty, integrity and credibility of both the employees and the bank has been violated and has eroded to the core the the nations primary financial disciplinarian. How could the public have trust in the rest of the other banks and financial institutions. They have come down to the level of pimps and prostitutes.
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len / October 22, 2016
What credibility One must have credibility in the first to lose.RW belongs to plethora of politicians that floating around the world devoid of any credibility.
What is sadly amusing so called intelligent people making excuses for RW & MS pointing to last corrupt leader MR. Very similar to US that has come up with worst candidates. Amusing to see genius Obama who loathed Clintons now embrace Clinton to keep a lid on his failed administration secrets.
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words / October 22, 2016
Beautifully said.
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jehan / October 22, 2016
FIL & SIL did the deal at home. insider dealing written all over, with UNP getting a kick back. So Ranil can defend. This type of stealing is dangerous than the straight forward bribe type of stealing done by MR.This type of stealing is known as institutionalized theft where the system is created so People in power get there cut.
Average person wont understand what has been stolen, as its very indirect, though it affects every single person in the country.
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S.Selvarajah / October 22, 2016
We must accept the COPE report tp Parliament. The P.M., and the Minister are both responsible, as they are trying to save their friend, Ex. Gov: Mahendran.
Hang them all.
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shankar / October 22, 2016
” One bank quoted to lend the amount at 11% interest per annum and another bank quoted with 4.6% interest rate.”
very nice example.now all modayas can easily understand that this is not james bond.Only thing is it could have been elaborated further by saying that in this case the banks are not using their money to give us the loan for the car,but are getting it from the central bank.so they make thumping profits of 10 billion rupees making use of our own funds to give it back to us at a high interst rate.
BTW my letter to the CB governor asking for a loan of rs.100000 to buy a air fryer for health reasons was turned down by the governor.I thought he looked like a kindly old gent and would fall for that line,but looks can be deceiving.
health is wealth,but in sri lanka you need wealth to stay in good health.
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shankar / October 22, 2016
“Is Ranil’s Credibility At Stake?”
hahahahaha.credibility will be the least of his worries because he had no credibility with the people in the first place.It is his arse that is going to be on fire,this was like a cheenapatas stuck in his arse all this time and not lighted because the matchbox is the COPE report.was his desperate attempt to save mahendran because of his friendship with him?poooh.
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Silva / October 22, 2016
[Edited out]
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shankar / October 22, 2016
[Edited out]
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Gamarala / October 22, 2016
Thanks for the enlightening article.
When Ranil’s said enmass all MPies did not know what bond is, was it the reflection of his own ignorance of what bond meanshe referred to.
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thondamannay / October 22, 2016
COPE Report Is Due Soon: Is Ranil’s Credibility At Stake? YES. IT WAS SINCE MARCH 2015.
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ranil / October 22, 2016
Please read ” Central Bank’s 30 yr Bond Debacle: What is the “Loss”? ” by Verité Research……….
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Silva / October 22, 2016
“I am not a mathematician. But I still admit that mathematics is the apex of all sciences including “economic science.” Without mathematics I cannot imagine what kind of civilization this could be. Perhaps, Prime Minister Ranil Wickeramasinghe could better explain about it.”
This Hema Matimola never say die! Bugger has been vomiting this higher interest rate story ad nauseum now. What his clown does not say is who fixed this so called lower interest rate which is the crux of the matter! Mahinda Rajapaksha through his rogue economists like Cabraal tampered with and doctored economic indices of the country and artificially lowered the domestic interest rates quite in contrast to the inflation and reality figures of the country. It is this interest rate that has changed during AM period. This high interest rate story is totally hypothetical and cannot constitute a concrete case against AM in a court of law-not in the jungle court of Handunnetti and Rajapaksha vassals in the parliament and media rags of course! If as they argue the interest was higher during that particular period of AM, then same rate should have come down by now under the new CBG which is actually not the case. On the contrary we depositors are now happy that we now get some sort of an interest rate as opposed to the meagre rate we were forced to accept during Rajapaksha tyranny days. This Hema et al bastards are uttering half truths and misleading the gullible readers. The fucker is emitting verbal diarrhea about the massive profit of Perpetual but what the fucker does not disclose is who is responsible for creating a rule in central banking for offering lower interest rate loans to primary dealers to offer to the government loans at higher interest loans using the same funds! Who legislated and legalized this practice of pickpocketing state and therefore public money at the expense of the tax payer? Hema and WA Wijewardena et al have been barking at RW for making AM’s appointment as the Governor but they are not barking at themselves nor the people for making tsunami hora the president of the country or for voting in the gang of thieves of the Rajapaksha clan to the parliament, nor have we seen them taking responsibility for creating a loop hole in the central banking law for robbing public money. We know this sucker hema, he has been sucking all the way to Mara and he must definitely be on Mara’s payroll.
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shankar / October 23, 2016
silva
why do you call yourself silva,when we all know that you are a tamil masquerading as silva and appearing on many websites.In one website you said that you initially started as silva and then it stuck on and you decided to continue.Devious motherfucker indeed.In another website just after the end of the war,i remember you tried to spread a story that gota has told the army to drink the tamils blood and rape all their women.You are a utterly shameless LTTE fucker who coudn’t bear the licking tey got at that time.Now coming to defend mahendran will only make it worse for him because they will think he is a close associate of yours and also a LTTE supporter,which he isn’t.Kindly fuck off where you belong in a garbage dump because internet manipulators like you are the ones who give the best communication tool in the world a bad name by your gutter standards of using it by masquerading and being devious.
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Silva / October 23, 2016
shankar,
You are such an astray beggar that your fucking genes are those rape injected by the Indian Wijaya. Also you have animal genes that you inherited from that lion with whom your grand grand grand grandmother slept with. Because of your k9 and awajathaka origins you always try to suck blood from thorough bred people like RW. Go and eat his toilet pit, disgusting animal.
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shankar / October 23, 2016
silva
you are a degenerate cheap internet loiterer who writes for the highest bidder.Your writings are that of a unequivocally myopic halfwit and a assault on the ocular senses.Abominably cretinous vermin like you are a repugnant disease we are all exposed to today on the internet.
preposterously detestable loafer of websites like you are loathsome pedestrian vermin, vile hemorrhoids and a revolting rumour mongering acrid smog of oppressively caustic oral effluvium.
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Richard / October 22, 2016
At least now the voters who are supporting either UNP or SLFP should realise that the politicians of both parties will not be interested in ridding themselves of cheap and destructive part politics and work for the betterment of the Country.
It is time that the voters put to use their energies towards establishing proper systems and legislation for taming these political animals rather than fighting among themselves defending unworthy leaders/political parties ! Richard
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colin / October 23, 2016
Yes Arjun Mahendran if he has done wrong should pay the prize.Thats only if he has done wrong. But why dont you raise a hue and cry about Nivard Cabraal and the Greek Bond issue and many other happenings.
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Silva / October 24, 2016
colin,
Please ask that question from the shankar fucker who pokes his uruhomba to every fart hole proceeding towards toilets early morning.
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