25 March 2015

Ranil rants, raves and knots himself up

Prime Minister Ranil Wickremesinghe has come out with a lengthy speech on the vexed matter of Treasury Bonds.  He has defended Central Bank Governor Arjuna Mahendran, pledged an investigation in the interest of affirming that there was no wrongdoing, defended the composition of the panel appointed to investigate and cast aspersion on several individuals and groups. 

It is good that Wickremesinghe has broken his silence on this issue.  It is good that he has decided that an investigation is a good idea.  It is good that he has sought to explain what he claims really happened.  It is extremely good that he has flagged certain questionable practices of the previous regime and Mahendran’s predecessor Ajith Nivard Cabraal.  It is good that he has named names, even under cover of Parliamentary.  

There are things unsaid, however.  There are measures that ought to have been taken but have not.  And there’s a lot of dodging that does not cover him in glory. 

Let’s get the easy stuff out of the way.  Since he has named names Wickremesinghe is now honor bound to initiate proper and criminal investigations into the activities of the named.  Since he has been an ardent opponent of shoving tough questions under a carpet called ‘commissions of inquiry,’ he should not take that easy path to save friends who betrayed trust (let’s assume) by indulging in wrongdoing. 

In the rush to name names, he has confused wrongdoer with people who may be tough to work with but whose integrity is nevertheless unquestioned.  That’s wrong.  Now he has to investigate such individuals as well and if he does this he is likely to come off as a reckless accuser, a man with an axe to grind and one of very little substance.    

Let’s get to the composition of the inquirers.  Wickremesinghe has not objected to the charge that they are members of his party.   When the Leader of the UNP gets UNPers to investigate charges leveled against a Governor he appointed, there is obviously a conflict of interest.   It is scandalous that a senior politician and a lawyer missed this.  Instead of addressing the issue Wickremesinghe chooses to shoot the messenger.  It is shocking that Wickremesinghe accuses the accusers of having vested interest, in this context.

Let’s get to the bonds.  A point that has been largely missed by those commenting on the issue is the fact that there was a Rs 80-85 billion maturity which came up or is coming up.  The Governor either didn’t know about it or knew about it very late.  We don’t know if Mahendran held his head in his hands and if he did it was due to being ‘shocked’ by this piece of information.  But he done exactly that, he has no one to blame but himself.  It may have been due to the fact that many seniors in the Bank were sidelined because they were thought to have been close to his predecessor.  All based on stories, obviously.  If they had been unprofessional they should be appropriately charged and investigated. That didn’t happen.  The lack of information may have resulted in Mahendran being hit between the eyes. That’s what happens when politics overrides professionalism.

Indeed, one wonders if there’s any professionalism at all here.  The previous regime followed an erroneous methodology where small amounts were issued to the market while the majority were private issues, as Wickremesinghe correctly observed in his speech.  He claims that they were issued at favorable terms in the private placement, but this contradicts the general understanding that they were issued at the weighted average.  What is important is that the majority were to state funds and foreign investors.  A significant amount went to the EPF.  There was no benefit to private dealers whose constant appeal had been and is ‘let the entire demand and supply be sorted out in the market’ so that the Bank cannot decide arbitrarily.  However if they were, as he claims, issued at a high rate it means the primary dealers were conned.  Another issue that warrants investigation, please note Mr Wickremesinghe. 

There have been instances where the Bank mentioned 1 billion and sold 2.   They did accept more that what was on offer but the rate remained close to the previous week’s weighted average rate.   Primary dealers had, however, information about tenure and yield.  In other countries cut off rates are published.  The Bank hasn’t done this, perhaps to keep the rates down which of course does not favor primary dealers.  If there was any ulterior motive, part of it would have been, to put it crudely, to screw the market and benefit the state.  In this instance the yield actually rose 300 basis points from what was expected.  The Bank compromised the state, therefore.

Previously, the Bank would maintain a dialog with investors, nurture investor confidence and exert moral pressure to bid low.  The primary dealers typically bid a little above the market.  To insinuate that primary dealers are a cartel or a mafia is wrong.  However, if they indeed are a mafia or a cartel then it is now incumbent on Wickremesinghe to investigate them.  If he cannot prove it then of course there’s more egg coming on to his face.

Mahendran has expressed the position that the market should determine the interest rate.  This is correct on principle.  However there is this ‘thorny’ reality that the EPF makes up 60-70% of the market.  So the EPF can be used by the Bank to fix the market rate. However a low interest rate thus obtained would mean low market activity, which does not help.  The Bank has to take the EPF out of bidding so that the market is not distorted (as long as EPF funds are managed by the Bank).  Right or wrong, the bottom line is that there should be a) policy clarity, and b) information should be released in advance.  It is clearly out of order when you get people to put in bids based on operating procedures and practices and then change the rules once the bids are in based on changes in ‘want’. 

Wickremesinghe admits that this is what happened.  He says that it was discovered that a vast sum of money was required to pay off contracts.  Well, if he (or the relevant minister) didn’t know this and didn’t inform him or the Governor in advance, that’s unpardonable incompetence.  It is indeed strange that Mahendran, when the gooey stuff hit the fan, chose to talk about his son-in-law’s resignation as a director of the company under scrutiny and not about this sudden money-need of the Government.  Wickremesinghe himself or Eran Wickramaratne, the minister concerned, could have mentioned this three weeks ago.  They did not. Why not?

It goes without saying that bonds are not the only way to find money.  The bulk anyway goes to state institutions.  Perhaps Wickremesinghe didn’t know how to deal with the problem. However, now that he has mentioned it, it is clear that he has implicated himself as being party to whatever wrongdoing that took place even if he doesn’t benefit personally.  Since it is highway contracts that are at issue here, two things need to be said.  Such contracts are rarely if ever honored on time.  Secondly, there are low cost ways of dealing with the issue.  The Bank’s job is to find money for the Government at the lowest possible yield and at an acceptable risk profile.  A prudent debt manager would not lock in 30 year borrowing at a high yield.  Wickremesinghe would be hard pressed to name a single corporate entity that will borrow 30 year money on 12%. 

The Prime Minister points to an instance when there was a bond auction in 2013 where Rs 16 billion was raised though 5 year bonds at 11.42%.  Again he mentions the matter of ‘private placements’ ignoring the reality of who the relevant entities were.  He also forgets that while in the Opposition his party members bemoaned high interest borrowings of the previous regime.  He says nothing of the ‘logic’ of long term borrowing on high interest.  In any case that was a different time, a different context and different market realities.  Using it as a justification for what the Bank did is nonsensical.

The Government (and the President is complicit here courtesy his silence) has to do better than the previous regime.  The Governor has to do better than take leave and let friends of his appointer bail him out. 

As things stand, there won’t be betting on the outcome of this investigation.  Wickremesinghe has made sure that a friendly determination will be yielded.  To say the least, it is a poor show on his part.  

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