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The 30-year Treasury bond auction opened on February 27 to raise Rs.1 billion saw the new Central Bank governor Arjuna Mahendran at the centre of a controversy, with charges of insider trading and favouritism directed at him. A three-member probe appointed by Prime Minister Ranil Wickremesinghe later cleared the governor of any misconduct in connection with this bond issuance. The Prime Minister recently tabled in Parliament the report of the three-member probe.  However, the dust on the so called scandal is yet to settle and the political opponents of the government keep blaming Mahendran for the alleged irregularities and are pressing for an independent investigation. A reporter of our sister Sinhala weekly Irida Lankadeepa questioned the Central Bank governor on the allegations made against him and on the findings of the three-member probe contained in their report.
 

Excerpts from the interview:

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"I have done no wrong that goes against my conscience. The Supreme Court has acquitted me in the case filed against me. The report of the three-member Committee appointed to probe the issue says that I had no direct role in the decision-making process in the Bond issuance affair. "

"We departed from the existing procedure with regard to the issuance of Treasury Bonds. Certain people did not like it, because they took undue advantage of the system that existed. I only corrected a wrong practice that had been going on."

QThere is a serious allegation that the country’s economy has crashed since you took office as the governor of the Central Bank. How do you respond to this allegation?
The economy has not suffered a collapse as alleged. The economy has registered a 7 percent growth rate. The inflation rate has for the first time in the country’s recent history dropped to almost zero point. Remittances from Sri Lankan expatriates have reached the Rs.7 billion mark. The Bond market is functioning efficiently as never before. We were able to raise a record Rs. 400 billion from the bond market within one week. This kind of performance in the finance sector is unprecedented.


QIf the economy is performing well, how do your account for this bond scam? Do you maintain that no irregularity had occurred in connection with the Treasury bond auction?
That a relative of mine being a primary dealer in the bond market is the only issue that has arisen.


QAlthough you maintain that there is no issue involved other than your son-in-law being a Primary Dealer in the bond market, it has come to light although the original bond issue advertised was for Rs.1 billion carrying an interest rate of 9.5 percent, bids for Rs.10 billion at higher interest rates had been accepted. Don’t you call it an issue?
Earlier, a thing called a ‘Bond Market’ was not in existence. Bids were made and accepted at a private level. But the sale of bonds should be done by auction in the open market, where there is space for demand and supply to interact to determine the interest rates. Therefore, the interest rates that operated in the bond market earlier were ones created artificially.

The Public Debt Department of the Central Bank is functioning as an agent of the government for supplying it with liquid money. The government projects funding requirement for every week. That’s an order coming from the government. We have to provide the targeted amount of money. The government granted a 40 per cent pay hike to the public servants through its Interim Budget. True, certain taxes were increased to cover the increased public expenditure. But we had to consider the time lag involved in the recovery of the taxes thus levied, which could be possible only after April.


QTrue, taxes were increased. But there are obstacles in the way of getting necessary Bills passed in Parliament. How can you reach your projected economic goals if there is no possibility of getting legislation relating to fiscal matters enacted?
The only answer to it is to go for an election.


QThere is an allegation that the Three-member Committee of Inquiry cleared you of any misconduct and shifted the blame to another authority in the Central Bank. Your comments?
We held the Treasury bond auction on February 27. That was the last working day of the month. Meanwhile, we were informed that the projected government’s funding requirement as at March 2, 2015 was Rs.13.5 billion. By then we had raised only Rs.3.5 billion and we had to find another Rs.10 billion to meet the requirement. Being the deadline set was March 2, the following Monday, the Bank had no alternative but to accept bids amounting to Rs.10 billion - over and above the prescribed amount.


QThe Prime Minister appointed you the Central Bank governor. He has brought the Bank under the purview of the Policy Planning and Economic Affairs Ministry, a portfolio he holds. Isn’t there room for one to suspect that the Prime Minister was bent on shielding you from the very outset?
It is a globally recognized norm that the Central Bank should be free from State control. It is a responsibility of the Central Bank to keep the inflation rate at a low level through the implementation of an independent monetary policy. The new government has de-linked the Central Bank from the Finance Ministry in keeping with that norm.


QThe controversy has arisen from the serious allegation that the Perpetual Treasuries Limited, the company of your son-in-law was given preferential treatment in the issuance of Treasury Bonds. Do you rule out such a possibility?
There is an ongoing probe on that. We have to await the outcome. Once the probe is over, we hope to publicise the findings.


QThere are reservations about the Committee appointed to probe the alleged fraud. The three members that constituted the Committee are lawyers with ties to the UNP. Don’t you think there is a question of credibility about this Committee?
They are professionals with 25-30 years of experience as Attorneys-at- Law. One may subscribe to the policies of the UNP. It does not mean that one would be partial to the UNP in the discharge of one’s duties. For example, I have worked under Ms. Chandrika Kumaratunga, but I voted for the UNP. That’s the way with public officials.


QThere is already a motion against you tabled in Parliament.
I have done no wrong that goes against my conscience. The Supreme Court has acquitted me in the case filed against me. The report of the three-member Committee appointed to probe the issue says that I had no direct role in the decision-making process in the Bond issuance affair. The Central Bank officials discharge purely a professional function in the issuance of Treasury Bonds. Therefore, I don’t say in any context that the Bank had erred at any stage of the process. The report of the three-member Committee has now been referred to the COPE for investigation. I am not afraid to face that investigation because my conscience is clear.


QHow is that a major issue happened to rock the finance sector of the country within four months of your assuming duties as the Governor of the Central Bank? Did it result from a failure on your part or on the part of the government?
· We departed from the existing procedure with regard to the issuance of Treasury Bonds. Certain people did not like it, because they took undue advantage of the system that existed. I only corrected a wrong practice that had been going on.


QThe Central Bank Governor’s status as a Singaporean citizen is also under challenge?
 I am a citizen of Sri Lanka up to 2006. I was brought up in Sri Lanka. I studied in Sri Lanka. In 2006 I had to leave for Singapore due to the loss of my employment following the regime change. It’s a normal thing in a country like Sri Lanka for a person holding a position like the Chairman of the BOI not only to lose his job, but also any chance of getting any other job following a regime change. I had to look for a new job. I applied for a job in Singapore and was selected for it. I did obtain the citizenship of that country not because of any special love for that country, but because the Singaporean authorities preferred a citizen of their country for the job I got. If I refused to accept the Singaporean citizenship, they would have withdrawn the appointment.


QBut you append your signature on the currency notes as the Central Bank governor in English?
The Central Bank lawyers advised me to append my usual signature on the currency notes. They pointed out that if I placed a signature that I don’t normally use, in a possible currency note counterfeit case, the Defence counsel could dent the case of the prosecution by arguing that the signature even on the supposed to be the genuine currency note is a forgery. I can sign in Sinhala and Tamil too. I, in fact signed the Bank’s Annual Report in Sinhala.


QThe three-member Committee appointed to probe the alleged Treasury Bond scam in the process of their investigations has come upon evidence that Rs.27 trillion or Rs.2700 billion has been raised from the sale of Treasury Bonds without following the tender procedure in 2012, 2013 and 2014. According to reports that an inquiry into this startling finding is already underway. Is this inquiry being used as a ploy to detract attention from the 2015 Treasury bond scam?
Government in the past has incurred massive losses from the Treasury bond transactions carried out by way of private deals. We have followed a methodology that prevents such losses to the government. We are being criticized for doing the right thing.


QThere is an allegation that all sectors of the state have come under the close surveillance of the Prime Minister. Are you free to work independently as the Governor of the central Bank?
I was appointed as Governor considering my work experience in the Central Bank. In fact, I started my career as a Central Bank employee. I served in the Central Bank for 11 years. My predecessors like Ajith Nivard Cabraal and Sunil Mendis had never worked in the Central Bank in any capacity.


QYou asserted at the outset that our economy has developed. However, the Ministers of the previous regime themselves say that the Treasury is empty and the government is finding it difficult even to meet the monthly pay of the public servants. Do you say that situation has now changed for the better?
A country’s economy, politics and international affairs are found in one inseparable tangle. The former government was much aligned towards China in accordance with their foreign policy. But it is not so now, our export market is now with countries like The USA. It is important to develop international relations with these countries and it is happening now. Earlier through the relationship with China we were able to develop the country through loans. But there was no proper plan to settle these loans. To pay back such loans our incomes should increase. The State revenue, which was 19 per cent of the GDP, had fallen to 10.3 per cent in the recent past. This is the main economic issue.


QWhat plans do you have to increase the State revenue?
It is not difficult. The government failed to implement Prof. Lakshman Committee Report of 2012. This report which contained matters on tax revenue was kept aside without being implemented. It is now necessary to implement it, by which process the State revenue can be increased.


QWhat are the plans to redeem the country from the grip of the so called Chinese loans?
There is a simple way out. America, Japan and India are ready to provide loans based on concessionary interest basis to settle these loans. When these countries provide us the necessary funds, we could plan out the settlement of the loans on the concessionary terms allowed.


QIf the UNP is defeated at the next General Elections, will Arjuna Mahendran go back?
I do not foresee that the UNP would be defeated. People want us to strengthen the international relations. During the recent past we had received Rs. 7 billion as remittances from migrants. It is not relevant whether I work in Sri Lanka or abroad.

Courtesy by Sunday Lankadeepa