by Maheen Senanayake
Central Bank Governor Arjuna Mahendran Friday detailed the mechanics of artificial price depression and how bonds, private placements and artificial interest rate manipulation alleging that these are all linked to the previous government’s efforts at economic control.
The Governor, who has been accused by the opposition of having made a bad call with respect to a Treasury Bond auction in February said, " There are two allegations - one that I unnecessarily raised Rs. 10 bn. Instead of the advertised Rs. 1 bn. on February 27 as a result of which I purportedly raised interest rates in the country resulting in a loss to the government. The second is that my son-in-law was given priority."
Mahendran insisted that his son-in-law had resigned from his company even though he retained a shareholder position when Mahendran took up office as Central Bank Governor and said that Arjun Aloysius (the son-in-law) was not involved in operations of the company.
Explaining further, he said that when he took office on Jan. 23, it was evident to him that interest rates in Sri Lanka were at a very artificially depressed platform and attributed this to the way the Central Bank set its base rate.
He said: "I noticed something very peculiar in Sept. 2014.The Central Bank had announced a very curious monetary policy innovation whereby the re-purchase rate, which up to that point had been 6.5% was announced to apply on three days of a calendar month from the date of that announcement. On other days of the month, banks could avail only of a 5% repurchase rate."
He said that this was innovative and that he had not seen this anywhere else in the world.
"Effectively you had reduced the short end of the yield curve by 1.5 % with the stroke of a pen. Across the yield curve and therefore across all the maturities of bonds, the interests kept coming down. The way this was achieved was with captive institutions such as the EPF, the National Savings Bank, Insurance Corporations etc. were more or less forced by the Central Bank to subscribe to issues of these bonds and Treasury Bills at lower rates of interests than prevailed before."
Mahendran who worked in the Central Bank for 10 ten years since 1983 explained that one of the principal modes of effecting this was to avoid having public auctions of bonds. The standard methodology for issuing government bonds anywhere in the world is to have regular auctions, every week for some maturity or other. That had been dispensed with from September last year and in its place, was a system of private placements.
"This essentially was a mechanism to fix rates. Suppose you have an auction for a certain maturity every Tuesday of the month. If you miss one Tuesday you have to wait till the next Tuesday to purchase that maturity again through bids. In between, if I am let’s say an insurance company, and I have a lot of cash, I can go and buy it through a window we call a ‘tap’. The balance bonds from the previous auction can be sold to anyone, in between the auctions through the tap."
He further said that the tap had systematically become the norm while the auctions had been dispensed with.
On the day in question where Rs. 1 Bn worth of bonds were to be auctioned we decided to accept Rs. 13 bn because up to that point the private placement mechanics had not been able to raise the funds necessary for the business of government.
Explaining further the governor said, "The government sends us on a monthly basis, their cash flows, in terms of the cash they require to meet their obligations, given a month ahead. For the month of March 2015, the government needed Rs. 13.5 bn. Since the private placements had managed to raise only Rs. 3.5 bn , and we had a demand for almost Rs. 20 bn, in discussion with other officials we decided to accept 13.5 bn from the auction specially since officials in the public debt department had told me that it had been done before. "
The governor also explained that the Central Bank had found it difficult to raise money undershooting the government’s borrowing targets on 18 consecutive weeks previously.
This was carried out with the blessings of the "Monetary Board which is the governing board of the Central Bank," he explained further.
No comments:
Post a Comment