Treasury bond scam - Role of the Central Bank


BY Dr Janaka Ratnasiri

The Island Editorial of 04.11.2019 refers to the Forensic Audit Report (FAR) on the Treasury Bond Scam (TBS), questioning the decision of the Central Bank of Sri Lanka (CBSL) to seek the opinion of the Attorney General’s Department whether to release the report to the pubic or not. It is indeed a sad situation to find that the CBSL Governor has undermined the independence granted to the Central Bank when it was established 70 years ago.

CBSL reluctance to divulge audit report

It appears the Governor in not releasing the FAR promptly to the public, has opted to play politics by preventing the public to know who is responsible for the bond scam before the elections, probably fearing the findings could go against the party in power. The writer totally agrees with the Editor when he says "The people have a right to know them (findings) and their interests must take precedence over all others" and also with his other statement that "it defies comprehension why the CBSL is reluctant to release the audit report on account of the presidential election".

This type of behavior is the least the public expected from the Governor who is supposed to uphold the independence and dignity of the CBSL. On a previous occasion during a press conference held by the CBSL almost a year ago which was telecast on 02.10.2018, in responding to a query about the involvement of CBSL officials in investing EPF money in stocks in an unauthorized manner, the Governor only said that he would await the final recommendations of the on-going inquiry and take suitable action.

Governor remaining silent on

officials’ misdeeds

The CBSL being the highest financial institution in the country should set an example by not allowing any unscrupulous activities to creep into the system. If there is any semblance of corrupt practices among its staff, it is the duty of the Governor to hold an impartial inquiry on its own and either clear their names if found not guilty or take punitive action against such officials if they are found guilty. He does not have to wait for the completion of third-party inquiries. That is common sense. However, the Governor has opted to turn a blind eye to such activities for reasons best known to him.

Now that the FAR on the TBS is in the hands of the Governor, will he initiate action against any officials in the Bank who may have aided and abetted with Arjun Aloysius (AA) to offer lending to the Treasury to the tune of Billions of Rupees, without having adequate funds himself? The CBSL has offered Treasury Bonds to collect money through a set of brokers called Primary Dealers including AA’s company, enabling it to meet its day-to-day financial commitments. It was alleged that funds belonging to the EPF have been siphoned off illegally by CBSL officials to transfer to AA’s company.

When such allegations are levelled against his own staff, isn’t it the duty of the Governor to hold an internal inquiry to establish whether any of its staff were actually involved in the scam or not? If any officer is found guilty, the Governor should recommend to the Monetary Board suitable penalties including dismissal and also take measures to recover funds withdrawn from the EPF illegally. If there is firm evidence against the suspected officials, disciplinary action as well as legal action against them should be promptly taken within the country’s legal system. It is therefore surprising to hear the Governor wanting to consult the AG and defer any action against AA.

Previous case of interdiction

of Governor

It may be recalled that the first Ceylonese Governor of the Central Bank himself was interdicted for alleged misconduct in borrowing money from commercial banks for purchasing property and putting up a house for himself. The then Monitory Board (MB) thought it was not in keeping with the dignity of the position of the Governor to borrow money from commercial banks (see "A tale of two Central Bank Governors" in the Island of 18.09.2019).

It is noteworthy that the then MB wanted to maintain the highest ethical standards in the Bank and did not hesitate to interdict even the Governor if he had done something unethical in the eyes of the MB. But today, the MB appears to remain silent when Bank’s officials blatantly flout its code of conduct without even holding an inquiry to verify whether any of its officials are guilty or not of any misconduct. This obviously is a reflection of deteriorating ethical standards in the country since independence.

Bond scam, a creation of the


The writer published an article under the heading "Bond scam – Prosecute the real culprits" in the Island of 08.01.2018, suggesting that "without pointing the finger at the Perpetual Treasuries Ltd (PTL) alone, the authorities should immediately prosecute the relevant officials in the (government) institutions for aiding and abetting PTL for robbing them". Though two months short of two years have lapsed, nothing of that sort has taken place, indicating that the authorities are inclined to protect the real culprits.

In this article, the writer alleged that the TBS is a creation of the government itself. The necessity to borrow money from Primary Dealers with interest paid upfront to meet urgent commitments could have been avoided had the government managed its finances sensibly. Though a budget is presented to the Parliament annually, there is no effort by authorities to balance the budget within the revenue and instead depend on local and foreign borrowings, and then the government goes on a spree of spending on luxury items and spending on mega-projects with no frugality in mind.

Opportunities to borrow direct

Even if the government wishes to borrow money locally, there are other ways to do so as done prior to commencing the Treasury Bond system in 1997. The Treasury Bill was popular among the public for saving when it offered attractive interest rates. But during the tenure of a previous Governor, its interest rates were drastically reduced and people stopped in investing on Treasury Bills.

There are people who have surplus money willing to subscribe to billion-rupee debentures offered by private establishments and banks, the first day of opening. These people would invest in Treasury Bills if the interest rates are made attractive. It also gives an opportunity for the general public to benefit. The government could also borrow money direct from state and other banks instead of going through brokers and pay hefty interest to them.

The Treasury Bond system is a goose that laid golden eggs. The Primary Dealers who operated the system used to collect one golden egg a day and no one took notice. When one dealer after getting inside information attempted to grab all the eggs in one attempt only the scam was exposed. It is the Central Bank that has the mandate to change the system. The MB should think of the impact of the Treasury Bond system has on the economy of the country rather than the opportunity it creates for privileged private entities serving as Primary Dealers to make huge profits at the expense of country’s economy.

Parachuting of Governors

The public would like to know the reasons for the government to have got into the habit of appointing totally outsiders to this prestigious position overlooking the well qualified Deputies within the CBSL. The rot started when the previous regime appointed an outsider for this post who invested in Greek Bonds and alleged to have caused Billions of Rupees loss to the country. In fact, this Governor was responsible for lowering the interest rates on Treasury Bills.

This practice of appointing outsiders was continued by the present regime by appointing a foreigner as Governor for which the Prime Minister took the full responsibility but did nothing after the Governor absconded when the TBS was exposed. The present Governor though possessing the highest international credentials has proved to be a misfit for the position for reasons described above and his decision making most disappointing.

Appoint Governor from with

in the system

In conclusion, it must be said that this mania of the government to parachute people from outside to be appointed as Governor of CBSL should stop forthwith. There are dedicated, qualified, competent and most importantly honest persons available within the system suitable for appointment as Governor as done for many decades. If there are a few bad eggs in the basket, they should be identified and thrown away promptly.

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