23 September, 2020

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In Defence Of The Auditor General: The Govt. Should Not Blind Its ‘Third Eye’

By W.A Wijewardena

Dr. W.A Wijewardena

An Auditor General under fire by political authorities

The Auditor General of the Democratic Socialist Republic of Sri Lanka, a position created by its Constitution, has been of late at the receiving end from political authorities. It is reported that his performance has been subject to severe criticism by Finance Minister Ravi Karunanayake, followed by Prime Minister Ranil Wickremesinghe, in Parliament recently.

Alarmed by these ominous developments, the Editor of Daily FT had written a very strong editorial urging the civil society to protect the Auditor General and warning the public of the possibility of being treated to a toothless National Audit Commission.

Auditor General’s crime

What is the crime committed by the Auditor General? He had submitted a report on the bond transactions conducted by the Central Bank during 2008 to 2016 on the request of the Finance Minister and furnished a copy of the report to the Acting Chairman of the Parliamentary Committee on Public Enterprises or COPE simultaneously. However, the Auditor General has gone even beyond that as it is revealed now.

Acting in the interest of the full public disclosure which is what the present Government had promised to the electorate at the general elections by promising to deliver economic democracy, he has posted his 190-page-long report to the website of the Auditor General’s Department so that it is now a document available in public domain. The beauty of such publicly available documents is that no politician can misquote it to hurl unfounded accusations against their political enemies.

Finance Minister’s request is not according to law

Minister Ravi Karunanayake has requested for the report in question in terms of the powers vested with him by Section 43(2) of the Monetary Law Act or MLA. This section relates to reports which the Minister might request the Auditor General to complete on the accounts of the Central Bank.

However, the report sought by the Minister relates to the bond transactions and therefore, the Auditor General is not under obligation to furnish it to the Minister. Yet, in view of the national interest which the subject in question has evoked, the Auditor General has chosen to oblige the Minister.

A wealth of information previously not in public domain

The report has furnished a wealth of data on the direct placements made by the Central Bank during the period under reference when issuing Treasury bonds on behalf of the Government. Though the Auditor General has not done any conclusive research analysis on the direct placements, because he has looked at them from the point of view of an auditor, such data can now be used by other researchers to do the same.

Further, these data can be used to examine the validity of the charge made by Prime Minister Ranil Wickremesinghe in a statement delivered in Parliament immediately after the first bond scam of 27 February 2015 that the previous Governor Ajith Nivard Cabraal had been guilty of using direct placements which PM had misquoted as private placements to favour his friends and a handful of cronies.

Direct placements as a method of issuing Government bonds

What are direct placements? It is simply a mechanism of issuing Treasury bonds or bills directly to primary dealers at a predetermined interest rate (or equivalently at a predetermined price) instead of issuing them on the basis of competitive bids received from them through an auction. A government which is concerned about the interest cost of its public debt may use either of these methods alternatively or in combination to derive the maximum benefit for itself. It can happen in relation to domestic borrowings as well as to foreign borrowings equally.

Even present Government uses direct placements when making foreign borrowings

For instance, in the case of foreign borrowings, a Government may choose to issue sovereign bonds by calling competitive bids from prospective investors. Such investors are allowed to submit bids within a specified period allowing the Government to build the borrowing book and the Government may choose the appropriate cut-off interest rate at which it would issue bonds at the margin. The competitive atmosphere prevailing in the book building process is expected to give the best rate structure to the Government.

If the prevailing interest rate structure is not favourable to the government, it may, instead, directly place the order with some selected banks or selected investors and ask them to lend money to the government. The Finance Minister Ravi Karunanayake’s much-publicised claim of borrowing $ 2 billion from an unknown Belgian lender was such a direct placement.

The recent decision of the Government to raise a syndicated loan from some selected banks is another such instance. No one can blame the Government for going for such direct placements because the Government as the borrower has the right to choose the best available market or the best available rate structure or the both.

Direct placements in the domestic debt market

This is equally valid for domestic loans too. The Central Bank in this case as the fiscal agent of the government will see to that the government gets the best bargain from the market. If it feels that the auction method is the best, it would go for auctions; at the same time, if it feels that the direct placement is the best method, it would choose that option. Similarly, if it feels that the best is a combination of both, it will go for that too.

The 2001 World Bank-IMF Handbook on Developing Government Securities Market has observed that most countries have preferred to use a combination of these methods as the most practical approach but has warned that it should be practised consistently without shocking the markets (p 165). The consistent policy is the adoption of a preannounced method of placing Government bonds directly with prospective investors with regard to the rate at which they have to invest their moneys in bonds.

Direct placements are not a demon but a servant

As this writer had argued in a previous article in this series, direct sales which were started by the Central Bank in 1997 when it introduced the primary dealer system is not a demon but a servant, well serving the Government to raise money at the lowest costs and maintain interest rates at a stable level. Hence, any finance minister or a government should have welcomed it.

Despite this, apparently being misinformed by some interested parties within the Central Bank, Prime Minister Ranil Wickremasinghe had castigated the direct placement system which he misnamed as ‘private placements’ in the statement he made in Parliament referred to above.

Said the Prime Minister: “Records confirm that private placements had become a norm rather than an exception. In just one instance in 2013, Rs. 16 billion worth of five-year bonds were sold through auction at a yield of 10.9% and thereafter Rs. 76 billion of the same bond were sold through private placements at a HIGHER yield of 11.42%. Who stood to benefit from such acts? The answer is obvious.”

Prime Minister misinformed?

It appears that the Prime Minister has been informed by an interested officer in the Central Bank that it was a crime to issue five-year bonds in 2013 at 11.42% through direct sales. What the Prime minister had not been informed is that the prevailing market rate for an 8.0% – five-year bond was much higher at 11.63% in January 2013 and 11.45% in March 2013.

Hence, if the bonds had been sold at 11.42% under direct sales, it would have been at a beneficial rate for the Government since the bonds in question had been sold above the prevailing market prices. Those who had bought the bonds at those prices could not have made a profit immediately as alleged by the Prime Minister since the bond prices had remained at around the same low level almost throughout the year.

Dealers can make money if bonds have been issued at low prices

Any party subscribing to direct placements could make money only if such direct placements have been made at interest rates pretty much higher than the prevailing market rates or equivalently at pretty much lower prices than the market prices. Thus, if they buy these bonds at bargain prices, they could immediately profit by selling them at higher prices to other parties who are interested in acquiring such bonds. But if the bonds have been issued at around the prevailing market prices, there is no prospect for them to make big money through sales.

Thus, it is the responsibility of the Central Bank, when making such direct placements, to choose interest rates or prices close to the prevailing market rates. But, if they have failed to do so, then, the allegation made by Prime Minister in Parliament is substantiated. However, for lack of detailed information on such bond deals, there was no way to verify the claim made by the Prime Minister that such placements have been shoddy and corrupt.

Findings of the Auditor General: Bonds placed at higher prices

The report submitted by the Auditor General has for the first time brought to public domain the detailed information relating to the direct placements made by the Central Bank during the nine-year period from 2008 to 2016. In conclusion, the Auditor General has remarked that 57% of the direct placements made during this period had been done at yield rates below or around the prevailing market rates and such yield rates had been desired from the objective of bringing the minimal cost to the Government (p6).

What does this mean? It means that a large volume of such bonds have been issued at prices above the prevailing market prices thereby bringing a good debt yield to the Government, on one hand, and preventing the initial buyers from reselling them at higher prices and making huge profits, on the other. Also, according to the Auditor General, the cost to the Government has been lower in the case of the direct placements than under the auction system.

What does this mean? It means that primary dealers have been trying to push the interest rates up under the auction system as foreseen by the former Governor A.S. Jayawardena when he introduced the direct placement system with EPF in 1997 as a check on such activity. The Auditor General has also observed that evidence to suggest that such direct placements have been made without the approval of the Monetary Board had not caught his attention (p 4).

Two matters for the attention of both PM and FM

There are two other observations made by the Auditor General which should receive the attention of the Minister of Finance and the Prime Minister. One is that the former Governor Arjuna Mahendran had scrapped the direct placement system in February 2015 on his own without getting the approval of the Monetary Board. In hindsight, it can, therefore, be concluded that his arbitrary decision against the wise counsel of the officials of the Public Debt Department has helped one of the primary dealers, Perpetual Treasuries, to make huge profits by buying Treasury bonds at ridiculously low prices.

The other is that the Perpetual Treasuries which had been a giant in the Treasury bond market since the first bond scam in February 2015 had in fact been one of the small dealers in the market prior to that. In the period from April to October 2014, it has participated in the Treasury bond issues with small amounts ranging between Rs. 100 million and Rs. 200 million. But since February 2015, its participation in the market has been in billions allowing it to make profits amounting to Rs. 13 billion within a matter of just 18 months. This is not a fact that the Prime Minister as a politician dedicated to establishing a clean government and the Minister of Finance as the keeper of the public purse could ignore.

Evidence does not show that bonds have been sold to cronies

The evidence presented by the Auditor General does not substantiate the allegation made by Prime Minister in Parliament that direct placements made prior to February 2015 have been made to help an exclusive group of cronies. The list provided by the Auditor General for each of the years since 2008 as recipients of bonds under direct placements include all primary dealers without exception.

Further, direct placements have been made at or around the prevailing market interest rates thereby preventing any particular primary dealer from making profits at the expense of other primary dealers. Hence, it appears that the Prime Minister has been misinformed by an interested official of the Central Bank and it is in the interest of the good governance Government to initiate an investigation into such misreporting, leading to an erosion of the reputation of the government.

Government should not blind its third eye

The Auditor General is the third eye of the Government as this writer has argued in a previous article in this series. If the Government deliberately blinds that eye, it would do so to its own peril.

*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, could be reached at waw1949@gmail.com

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Latest comments

  • 2
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    It is the executives, legislators who legalize corruptions. I heard the most important clauses in the Recent Audit bill were removed inorder to make it not-that a serious or heavy legislation. So, the politicians who will steal would escape easily.

    • 1
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      Dr. Wije: Many thanks and keep up your great work!

      Today 8 individuals, including Warren Buffet and Dot Com millionaires own half the Global Wealth according to the report released by OXFAM at Davos – the Billionaire’s Hot Air HUB!

      Sri Lanka’s DEBT TRAP is not unique. Greece was in a Debt trap to IMF, like so many other countries. Should you not also focus your Excellent Critical analysis on the connection between Global Financial Governance Institutions and massive DEBT in countries like Sri Lanka?

      My suggestions is: Sri Lankan civil society and experts like you, should raise your voices against local corruption of politicians, as well as, the institutionalization of Financial CRIME for which the IMF and World Bank along with Goldman Sax and various Economic Hit men are DIRECTLY responsible for massive Economic INEQUALITY in the world today and the resulting social unrest, violence and resource wars.

      Dr. Wije. Don’t you think that Ranil Wickramasinhe and his team of Economic Hit men should ask World Bank and IMF it they really want to help Sri Lanka, to use all their IMF and WB so-called experts to track down the millions looted from Sri Lanka by Mahinda Jarapassa, family and cronies as well as Bond scam Mahendran as a PRIORITY, rather than selling off Sri Lanka’s land and marine resources to companies from China, US, India and Japan, in order to pay Sri Lanka’s massive national debts amassed by corrupt politicians, while borrowing more from IMF and pushing Lanka in a bigger DEBT TRAP.

      World Bank and IMF and their so called Advisors, knowledge brokers and experts are part of the problem it seems.

      IMF and WB as institutions are supposed be part of global Financial Governance Architecture, but their PhD. experts protect financial crime and criminals, rather than track them and their off shore bank accounts in tax havens down. IMF and World Bank are supposed to do Global Financial Governance but rather are putting poor countries into massive DEBT TRAPS.
      WB and IMF protect global financial crime, off shore bank accounts and tax havens for the corrupt rich, including multinational corporate criminals, bond traders, and third world corrupt dictators.

      Because of Governance failures of WB and IMF global Economic INEQUALITY and WARS have increased massively, people do not trust global institutions and Trump is the President of the United States with the help of these outfits.

      IMF and World Bank are supposed to be in charge of Financial Governance and they should be asked to track down the Financial Crimes- the millions looted from Sri Lanka and other countries in the Global South by corrupt dictators and politicians.
      WB and IMF are part of the problem, and not the solution to CORRUPTION, INEQUALITY, POVERTY, SOCIAL UNREST, WAR and RACISM in Sri Lanka or any where else in the planet.

      • 0
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        Dr. Wijewardena,

        Don’t you think that FCID, Central Bank, Bribery Commission of Sri Lanka, IPS and civil society NGOs should write to IMF and World Bank, to ask for help, to track down and return funds stolen by corrupt politicians of previous and current regimes, to pay off the national debt of Sri Lanka, rather than let Ranil Wickramasinghe’s Economic Hit men load VAT taxes onto poor people?

        After all, IMF and WB are supposed to be doing global Financial Governance, but seem to have forgotten their core mandate and are competing with United Nations Agencies in developing countries…

        Ranil Wickramasinhe and his team of Economic Hit men should also ask World Bank, IMF and US Govt. and USAID to help Sri Lanka by using all their experts at Harvard University and elsewhere to track down the millions looted from Sri Lanka by Mahinda Jarapassa, family and cronies..

        • 0
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          Seems that the concept of “Due Diligence” does not exist for the PM, Finance Minister and their so called Development team that takes its instructions from Washington DC.?

          • 0
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            Due diligence in Hot air HUB Lanka, where so-called development is to benefit corrupt cronies of politicians and multinational corporations in China while looting the people and destroying the environment of Sri Lanka.. You must be joking..!

            Ravi K has announced to the Banker that he expects “US$ 5 billion investment into the Hambantota Industrial Zone”
            The 5 billions will fall from the sky, no details needed to be provided, no due diligence. Just like the Tyre Factory and Volks wagon plant investments!

            Sri Lanka is a hot air HUB where hot air corrupt clown Ravi K talks nonsense. Well the Banker magazine is another Hot air produce, that made Ravi K. the best Finance Minister of the World for putting Sri Lanka into the IMF Debt Trap, bond scam and being most corrupt!

  • 0
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    “Two matters for the attention of the PM and FM”…………………”
    These two paras show how Mahendran paved the way for his Son-in-Law’s firm Perpetual Treasuries to make a huge profit.

    This man has committed an economic crime and should be prosecuted.
    But he appears to have become a “sacred cow” of the government!!

  • 1
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    Mr auditor general we have clear info on whose agenda you had made the report. Got you mr auditor this time. If you dont come out who made you to prepare the fake bond scam report in 2 days i will go public with evidence

  • 1
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    In western countries and some of Asian countries like China and India Auditor General or Audit Commission play a significant independent role in monitoring government finances. Government audit serves as a strong watch dog. If government audit is strong there is no need for other commissions to investigate corruption.
    Sri Lankan Auditor General is eminent Chartered Accountant with competencies to do his job well.

  • 0
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    Thank you very much for yet another enlightening piece and defence of the AG against vested interests.

  • 0
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    Dr. W.A Wijewardena

    Prime minister offered to create one million jobs for voters. but, he did not say how is going to do that. the first thing once he became the prime minister was this Central bank scam. I think, Ranil wickramsinghe knew what Arjun Mahendran was goin to do. Yet, he allowed it.

    It is common sense one need to know not only to earn but how to protect what one has earned. In sri lanka, Women working in the middle east (mostly) send about $ Seven billion a year. govts know only how to spend that. Understand, how would we have done if the Ruwanveli seya, Parakrama Samudraya were built on foreing aids and by foreign know how and technology.

    Why Maithripala is silent. Is he part of that. He talks. but, just like FCID nothing happens. SLFP Secretary also did a similar deal. but, it was just one billion. He paid extra money to a damaged building to be leased and the bill was one billion. It looks voters have no escape.

    See what Mahinda Rajapakse is saying. He simply does not understand that he was a partner to the what has happened to the country.

    I think, in this govt Prime minister anf the Ministry of finance are the most corrupt.

  • 1
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    Some where else, I read, that IMF had asked a former president to close down a manufacturing plant and instead, import the item. Same thing they were doing to Sri lankan rice crop and they wanted Sri lanka to import from Vietnam eventhough we don’t eat Sticky rice.

    Sri lanka politicians listen to IMF/world Bank. Don’t promote manyfacturing in Sri lanka. We can not produce enough vegetables, grains, spcies, potato, onion to feed our selves. Sri lanka is supposed to be an agricultural country for it’s entire history.

    Yahapalana govt has borrowed -loans, cash swaps, money prining, Treasury bills of various durations, bonds- and is borrowing far far more than what Mahinda Rajapakse borrowed and yahapalanaya is accusing previous govt for everything, They sacrifice what that women are sending and they borrow billions.

    Just think, if that $ seven billion were spent on our people and if we built all these mega projects ourselves, if our people were paid extra. then would stay in Sri lanka and would spend that money in Sri lanka.

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