Vision 2025 Part 4: PMs alleged instructions to

remove direct placements are against the

Vision
Prime Minister Ranil Wickremesinghe

Former Central Bank Governor Arjuna Mahendran

Clarification

Monday, 9 October 2017

Deputy Minister of National Policies and Economic Affairs, Dr. Harsha de Silva,
in an email to this writer, has clarified that what is meant by the goal of being
enriched in V2025 is not to become a rich country in terms of the World Bank
classifications. Instead, Its about a country rich in money as well as values,
culture, etc. What it means is that V2025 envisages to be a prosperous nation
by 2025 still remaining in the higher middle income country category which Sri
Lanka will join in 2017.
In the previous parts
In the previous three parts of this series, it was noted that the Vision 2025,
released recently, was in fact the fourth of such visions placed before the public
after the present Government came to power some two years ago.
All four visions had one underlying philosophy, namely a knowledge-based
highly competitive social market economy as the guiding light of the nations
policy. It was noted that this philosophy, adopted from post-war Germany,
which sought to have a third way different from Western Capitalism or Soviet
Communism, had been customised to suit Sri Lankas specific situation.

Sri Lanka lacked both knowledge and competition and therefore

they had to be added to the social market economy which had combined both
the free market economy principles and the need for supporting
vulnerable groups left behind in a competitive market economy.
It was also noted that all the four visions had presented just a wish list and
hence they had to be translated into concrete actionable plans for the
realisation of the intended goals. However, after the presentation of the first
three visions, there was no such actionable plan prepared and therefore the
goals in visions had just remained desired wishes. Thus, it was emphasised that
the same fate should not befall the current statement Vision 2025 as well.
The present vision had goals corresponding to the countrys election cycle and
not to any perceivable economic cycle. Hence, the objective of the Government
had been to present the electorate with a success story to secure re-election in
both 2020 and 2025.
However, they had accelerated the original long target of making Sri Lanka a
rich country to 2025 requiring the country to maintain a high economic growth
of around 16% per annum till 2025. It was noted that, given the countrys low
economic performance in the past, this was an uphill task for the Government.
Further, it was also noted that the plans of the Government to tackle the
countrys boiling public debt problem were short of a permanent solution that
called for a drastic curtailment of consumption by all.

An independent Central Bank as a facilitating partner

In this part, we will look at how Prime Minister Ranil Wickremesinghes alleged
instructions to the former Governor Arjun Mahendran to abolish the direct
placement system of issuing government securities would be counter to the
vision of establishing an independent Central Bank in the country.
Prime Minister Wickremesinghe, in his first economic policy statement
delivered in Parliament in November 2015, assured the nation that his
Government would introduce necessary legislation to enable the Central Bank
to function as an independent institution.
In V2025, he has gone further and promised to introduce necessary legislation
to facilitate the Central Bank to have inflation as its prime target without the
intervention of politicians.
The Central Bank is an independent institution for monetary policy and its
budget is within the existing laws. Hence, when he said that his Government
would make the bank independent, what was implied was that the bank would
be fully independent from political authorities like Germanys Bundesbank or
Englands Bank of England.
When the first promise was made, it was welcomed by the market. But no
action was taken within the last two years to put this wish into practice.

PM deciding monetary policy?

Instead, the opposite has happened, as revealed by evidence given by the

former Governor Arjuna Mahendran and others before the Commission of
Inquiry into the Issue of Treasury Bonds, commonly known as the Bond
Commission.
The evidence and many other acts which occurred during this period suggest
that there have been attempts at compromising the independence of the bank.
Mahendran, giving evidence on oath, told the commission that Prime Minister
Wickremesinghe advised him to do away with the practice of issuing bonds
direct to primary dealers, a practice which had been used by the bank since
1997 and known as direct placements. The Central Bank, its senior officers and
the Monetary Board, from day one of the alleged bond scam, tried to paint a
demonic picture about the direct placements in practice.
Even Prime Minister Wickremesinghe, it appeared, had been misinformed by
the bank about the direct placements as was evident from the statement he
made in Parliament in March 2015 explaining the action his Government had
taken regarding the bond issue in question (available at:
https://www.colombotelegraph.com/index.php/treasury-bonds-investigation-
pm-ranil-wickremesinghes-full-speech-today/)

Was PM misinformed?
 In his speech, Prime Minister
Wickremesinghe had said: 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.
It appears that the Prime Minister has been informed by Central Bank officials
that it was a crime to issue five-year bonds in 2013 at 11.42% through direct
sales. What the Prime Minister has not been informed about is that the
prevailing market rate for 8.0% - a five-year bond in January 2013 was much
higher at 11.63% and 11.45% in March 2013.

Who supplied incomplete information to PM?

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 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 remained at
around the same low levels almost throughout the year.
It is not comprehensible why the Monetary Board at that time the objective,
impartial and impassioned advisor to the Government chose to supply
incomplete information to the Prime Minister.

Laws dont permit political authorities to issue instructions to CB

Now the former Governor Mahendran has revealed in his evidence on oath
before the commission that it was Prime Minister Wickremesinghe who had
advised him on 24 February 2015, three days before the controversial bond
issue, to do away with direct placements as a method of issuing government
securities (available at: http://www.ft.lk/front-page/Mahendran-mauled-by-
more-grilling/44-640821).
In terms of the existing laws, neither the Prime Minister nor the Finance
Minister can give directions to the Monetary Board which enjoys autonomy
with respect to policy making.

Monetary Board and not the Government which makes monetary policy
decisions

This specific arrangement which conforms to the worlds best practices in

central banking was introduced to the banks governing law, Monetary Law Act
or MLA, by its architect, John Exter, for a good reason.
That was to prevent the politicians from abusing the Central Banks power to
print money and thereby erode its value with the adverse consequence of
people losing the real value of their wealth in financial form. It would not only
create chaos in the economy but also hamper the countrys long-term growth.
Hence, the Central Banks Monetary Board was given full powers to conduct its
policy without the interference of the government in power.
However, since the Government has the overall responsibility for the economy
and if there is a disagreement between the Minister of Finance, the
representative of the Government, and the Monetary Board with respect to any
policy, a special provision has been made in MLA under section 116(2) to resolve
such disagreement.

Political interference in CB should be transparent and lawful

The section under reference says that in the event of a disagreement between
the two parties, every effort should be made to reach an agreement. This is
because any open battle between the Minister of Finance and the Monetary
Board will not augur well for the country in the eyes of the investors.
However, if an agreement cannot be reached, the relevant section empowers
the Minister of Finance to inform the Board that the government accepts
responsibility for the adoption by the Board of a policy in accordance with the
opinion of the government and direct that such a policy be adopted by the
Board.
When such a direction is given by the Minister, the Board shall carry out such
direction. Hence, the Prime Minister cannot give any direction to the Central
Bank under the law. Even if the Minister of Finance is to give any direction to
the Central Bank, it is presumed that he should first get the approval of the
Cabinet of Ministers headed by the President since he commits the Government
to take responsibility. Any other direction is illegal and, hence, the Monetary
Board is not bound to carry it out.

A Governor acting in naivety compromising CBs governance principles

In this case, it is totally nave for the former Governor Mahendran to carry out a
direction given by the Prime Minister which is outside the law. It is equally bad
that he does so without getting the prior approval of the Monetary Board which
is the competent authority of the Central Bank under MLA.
Thus, in the concerned case, there is a failure on the part of the Monetary Board
too, since it had not raised this issue with the Governor, according to the
evidence placed by senior Central Bank officers before the Committee on Public
Enterprise or COPE in its second inquiry. This is a serious issue relating to the
governance of the Government, governance of the Governor and governance of
the Monetary Board of the Central Bank. It is bad for a Government which has
pledged to deliver good governance to Sri Lanka.

Dahanayake saga of directing CB policy

In the whole of the Central Banks history, there is only one occasion where the
Government of the day had invoked the powers it had got under section 116 (2)
of MLA. That happened in December 1959 when the Monetary Board decided to
increase its main interest rate on its short-term loans to commercial banks,
known as the bank rate, from 2.5% to 3% per annum.
The Government of the day under Prime Minister Wijayananda Dahanayake
was to run for an election the following year and it thought that the increase in
interest rates would jeopardise its chance of being re-elected. Hence, it directed
the Monetary Board to restore the interest rate to its previous level under
section 116(2) taking responsibility for its decision.
However, analysts later remarked in a lighter vein that the Government took
full responsibility for its direction since it was ousted from power with the
Prime Minister too losing his seat in the subsequent election.

A Governor is not supposed to blindly follow instructions

A Governor who knew his job would have explained the matter to the Prime
Minister when the alleged instructions had been issued.
If the Prime Minister did not agree with him, then he should have immediately
reported the matter to the Monetary Board for a decision. In such vital issues
involving the independence of the Monetary Board, the Governor cannot and
should not take action on his own. The direct placement practice had been in
use at the Central Bank since 1997 and even the Monetary Board at its meeting
held just one day before on 23 February 2015 had decided to continue with it in
the forthcoming Treasury bond issues.
The direct placement system had been a vital instrument available to the
Monetary Board to prevent undue increases in interest rates via collusive action
by primary dealers. Hence, before abolishing it, the technical staff of the Central
Bank should have thoroughly analysed its pros and cons and apprised the
Monetary Board of the desirability or otherwise of its abolition. None of this
had happened in the Central Bank in this case.

A farsighted PM would have listened to CB

This writer believes that had it been explained to Prime Minister

Wickremesinghe, he would have accepted it given his past track record of not
showing arrogance on three previous occasions.
The first happened in 1994 when he was the Prime Minister and campaigning
for re-election at the general elections held in August that year. A request was
made by his campaign managers to Governor H.B. Disanayake for release of a
lady non-staff officer to serve on the campaign. Governor Disanayake, who
consulted the senior staff of the bank and the Monetary Board, rejected the
request and informed Prime Minister Wickremesinghe that the Central Bank
had no powers to do so. Prime Minister Wickremesinghe did not make any fuss
about it.
AS Jayawardena refusing to accede to illegal instructions

The second and third instances took place from 2002-2004 when he was the
Prime Minister again and at that time A.S. Jayawardena was the Governor of
the Central Bank. On a paper submitted by the Minister of Finance, the Cabinet
had approved the appointment of a senior officer of the Central Bank to the
Ministry of Finance as economic advisor. Under MLA, Central Bank officers could
be released to other government bodies provided the consent of the officers
concerned had been obtained.
In this case, the officer concerned had not given his consent and therefore could
not be compelled to accept the appointment. Governor Jayawardena informed
the Ministry accordingly and the Government headed by Prime Minister
Wickremesinghe accepted it.
On the third occasion when there was a general election in 2004, the Opposition
had presented an election manifesto with a number of unmanageable goodies
to the people. Since the costs were enormous, it was beyond the financial
resources of the Government. The Cabinet then decided to direct the Central
Bank to examine the financial prudence of the manifesto in question and submit
a report. Governor Jayawardena informed the Prime Minister that it was not a
job of the Central Bank to examine the manifestoes of political parties. As
before, Prime Minister Wickremesinghe accepted Governor Jayawardenas
explanation.
Politicians love to control the Central Bank. But it is the responsibility of the
Governor and other senior officers of the bank to defend its independence.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka,
can be reached at waw1949@gmail.com)
Posted by Thavam