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The Dailymirror sat with former Ce ntral Bank Governor, Ajith Nivard Cabraal to discuss current economic, trade and monetary issues, as well as certain allegations against the Rajapaksa administration. Excerpts.



Q     Mr. Cabraal, one of the main allegations against you is that you have instructed the Monetary Board to pay a staggering Rs. 1.39 billion to middlemen and two public relation agencies in the US to promote Sri Lanka and lobby on behalf of the Mahinda Rajapaksa regime in the US without Cabinet approval. How and why?

The Monetary Board has been given a clear direction by the Presidential Secretariat to effect the payments for the lobby and PR services and therefore, the payments were properly authorised. The payments had been made by the Central Bank in keeping with such instructions and hence it is grossly inaccurate to state that I had “instructed the Monetary Board to pay a staggering 1.39 billion….” In this context, the Monetary Board was also made to understand that the Government had retained the services of certain PR, legal and lobby agencies under this particular project which was to provide an accurate status of the Sri Lankan situation to the top US leadership.

For the record, let me also categorically state that the Governor has no authority to “instruct” the Monetary Board, and that it is actually the Monetary Board that has the authority to issue “instructions” to the Governor and the Central Bank.

 

"The Central Bank is an organisation that is manned by highly qualified and experienced professionals. The best brains in the country are recruited to the Central Bank, and once selected, are sent to the world’s top universities for PhDs, post graduate studies, and other relevant courses"

Q   It has been alleged that the former monitoring MP of the External Affairs Ministry of the Mahinda Rajapaksa administration, Sajin Vass Gunawardena has been closely involved in those transactions. Can you comment?

As already stated, the project was to accurately convey Sri Lanka’s position and stance to the top leadership of the United   States, and the project was implemented by the Presidential Secretariat and Ministry of External Affairs. Hence, describing such an effort as “those transactions”, may not seem appropriate or accurate. Everyone in Sri Lanka was aware that a massive amount of negativity was being churned out in the US by various forces inimical to Sri Lanka’s national interest, and hence a great deal of work across many levels of the US leadership, civil society, and influential think tanks, needed to be done by key Sri Lankan authorities in order to portray the correct picture. Perhaps that is why a lot of input and co-ordination was provided by politicians and senior officials of the Presidential Secretariat and the Ministry of External Affairs.    




Q   What is this rumour that the Central Bank has retained the disgraced former IMF chief Dominique Strauss Kahn as an advisor paying USD 750,000 a month, when you were the Governor?

As is well known, the previous administration had an ambitious vision of taking Sri Lanka to a US 7,500 per capita income, and creating an economy with a GDP of over USD 150 billion, by the year 2020. In order to do so, a 5 + 1 hubs concept was actively pursued, and that included promoting Sri   Lanka as a global commercial destination.  In that regard, gradually positioning Sri Lanka as an “International Financial Centre” within the region and the world was considered to be of vital importance. In order to make that a reality, it was considered necessary for Sri Lanka to have the required laws, practices, procedures and conditions in place, at an international standard, so that Sri Lanka would be attractive to global investors who seek  international safeguards when conducting their business.

 

"The Rajapaksa administration had followed such procedures in approving unsolicited projects, including the “Port City Project”"

In that context, it was considered essential for Sri Lanka to obtain the required advice, guidance and assistance from knowledgeable and experienced sources, and Mr. Dominique Strauss Kahn, (DSK) and his consultancy firm was considered to be an outstanding source to provide such services, considering the fact that DSK was a former Minister of Finance of France, and a highly recognised and competent former Managing Director of the IMF who was internationally known for his wide knowledge and ability. At the same time, the total professional fees that were negotiated for the comprehensive services to be rendered by his firm with an extensive list of deliverables was a total of USD 750,000, with the assignment spanning a period of one year. Several other top professionals are also due to contribute their services. Hence, to state that DSK was being paid UDS 750,000 per month, appears to be a deliberate exaggeration to discredit the former Monetary Board.

In this regard, it must also be stated that the initial fee quoted by DSK’s firm was significantly higher than USD 750,000. However, due to the relationship that the Central Bank had built up with DSK since 2009 when Sri   Lanka first negotiated the USD 2.6 billion standby arrangement with the IMF, the Central Bank was able to persuade his firm to accept a fee which was significantly lower than the initially quoted one.

 

"The Monetary Board was of the unanimous view that the Sri Lankan economy would benefit immensely from this consultancy assignment. The new administration has now decided not to continue with such an assignment"

Let me also add that the Monetary Board at that time was of the unanimous view that the Sri Lankan economy would benefit immensely from this consultancy assignment. Nevertheless, the new administration, for whatever reason, has now decided not to continue with such an assignment. In that regard, I could relate to that decision, since I believe it is a prerogative of the new Monetary Board to assess all existing contracts, assignments and initiatives in the light of their own economic agenda and new priorities, and take decisions, the same way that previous Monetary Boards had done in the past, based on their vision and priorities at that time.  



Q     The members of the UNP, now in power have continuously raised doubts about statistics and other data issued by the Central Bank on the economy, money market,  foreign reserves etc. How correct or incorrect are those allegations?

The Central Bank is an organisation that is manned by highly qualified and experienced professionals. The best brains in the country are recruited to the Central Bank, and once selected, are sent to the world’s top universities for PhDs, post graduate studies, and other relevant courses. The Central Bank also has efficient and effective systems, procedures, and stringent internal controls for all its functions. Such processes extend to the gathering, collating, validating, analysing and presenting of information, data and statistics as well. At the same time, the statistics of the country are prepared and presented by the Department of Census and Statistics (DCS) which is the official agency responsible for the compilation of statistics in the country. The DCS also does so scientifically, methodically, and professionally, while relying on several agencies of government and the private sector to feed them with the basic and raw data. In addition, multi-lateral funding agencies such as the IMF, World Bank, and the ADB periodically review the statistical processes employed by the DCS and the Central Bank in order to assess the integrity and accuracy of the statistics, as well.

Accordingly, it may not be too wise for governmental sources to discredit the existing statistics of the country and damage the credibility of the methodology in order to score political points. When they do so, they run the risk of such statements sending shock-waves across the global investor community that may lead to disastrous consequences, like what happened to certain countries in Latin  America, South America and Europe.




Q You were one of the top and close aides to former President Mahinda Rajapaksa, on economic and tax issues in particular. How do you justify the huge direct and indirect taxes charged by the Rajapaksa administration on essential commodities from the poorest section of society, despite the fact that the prices in the global market had dropped sharply on those goods?

One of the biggest criticisms that was made against the Rajapaksa economic policies was that the Tax Revenue to GDP ratio was at a very low level of about 14%, whereas in many countries similar to Sri Lanka, that ratio was closer to 18%. That result itself suggests that there were no “huge” taxes and burdens, as claimed by you. At the same time, the poorer sections of Sri Lanka enjoy a considerable number of benefits in the form of Samurdhi payments, charity grants, disability benefits, fertiliser subsidies, housing concessions, free plants and seeds, free books, free uniforms, etc. In the case of fuel prices, (petrol, diesel, and kerosene), it must be stated that levies on petrol and diesel are quite common in many countries because of the convenience and low cost of collection of tax. In keeping with such international practice, the Rajapaksa administration too, levied a tax which was added to the sale price of petroleum products. However we must acknowledge that when global oil prices were high, the Rajapaksa administration shielded the public from a large part of the increase with substantial subsidies, which of course led to large losses being incurred by the Ceylon Petroleum Corporation (CPC). As a consequence however, the CPC was compelled to borrow up to about Rs.400 billion from state banks to “finance” such losses, thereby placing some stress on the CPC as well as the banks. In that context, when global oil prices dropped, it was viewed by the then government as an opportunity to recoup some of those past losses, and to bring CPC and the state banks to a more viable position, by settling a large part of loans outstanding of the CPC. Even while doing so, the CPC provided some reasonable reductions in fuel prices, although some persons were of the view that the price reductions should have been greater.

As is now known, the new administration has given further price reductions in order to fulfill an election promise. Hence, the CPC would now have to postpone or slow-down the settlement of its outstanding loans to the bank, as it is likely that the CPC may have opted to delay the repayments to the banks in order to effect these government-directed reductions in the pump prices. The CPC may have also made use of the falling oil prices over the 2 weeks after the election in order to make a part of these reductions. Notwithstanding such reductions however, some analysts have recently claimed that the new administration has mainly passed down the “new” post-election reductions in the global oil prices to the Sri Lankan consumers, and that in actual fact, the authorities have not reduced the taxes levied on petroleum products.  




Q  The Maithripala Sirisena government has waived taxes on many essential commodities to bring down their prices which cost the Treasury a minimum Rs. 60 billion in revenue. As the former governor, can you explain the merits and de-merits of this move?

A government has the discretion of levying taxes according to its priorities, policies and overall economic strategy. The determination of how much taxes, on what incomes, and how often, are some of the decisions that have to be made by governments from time to time, and such policies are given effect through the budget and other legislation. At the same time, any government’s tax policy implementation is almost always a “trade-off” between competing interests. Very often, the Finance Minister has to strike a balance, because if certain taxes are waived from one section of the population, other taxes have to be imposed on another group of persons, or some public investment has to be curtailed or stopped. If not, the taxes foregone would have to be borrowed from foreign or local sources, or like what happened prior to 2006, certain state assets will have to be sold in order to procure the funds needed to meet the increased expenditure.

It is in this background, that we need to examine the present administration’s policy decision to reduce taxes on certain commodities. As is obvious, by doing so, the government has had to forego a large amount in revenue. As a result, they now have to recover such “lost taxes” from other categories of tax-payers, and that is probably why the Government has had to impose some heavy “super gains” taxes, “mansion” taxes, “sports’ channel” taxes, casino taxes, vehicle taxes, liquor taxes, etc. All these fresh impositions of taxes, as well as the generous waivers of taxes, have corresponding merits and demerits. Explaining them to the people, and convincing them that such course of action is the correct strategy for sustained economic growth, is the responsibility of the new administration, and in my view, not a matter that a former Central Bank Governor needs to specifically discuss. But let me only say this: If in the medium to long term, as a result of the new policies, the Sri Lankan economy grows strongly, the private sector expands consistently, poverty decreases significantly, the people become wealthier, employment opportunities are regularly created, debt levels are reduced, the currency retains value, and inflation remains within the low single-digit range, it could then be successfully argued that the new policy measures have greater merits, than demerits.




Q   Why did the Rajapaksa administration approve unsolicited projects like the ‘Port City Project’ that came under huge criticism by the UNP, JVP and many others?

In many countries, certain mega projects which do not involve state funding, are evaluated on their overall social and economic merit, according to criteria as may be specified by the administration. Such practices and procedures have been followed by successive governments in Sri Lanka too. According to my understanding, the Rajapaksa administration had followed such procedures in approving unsolicited projects, including the “Port City Project”, which is the largest ever foreign direct investment in Sri Lanka, with a investment envisaged at around USD 1.4 billion. According to reports, the relevant governmental agencies and organisations have evaluated, analysed, reviewed and recommended this project, and it has finally been approved by Parliament, as well.  

At the same time, as you have rightly stated, this project had been heavily criticised by the UNP, JVP and others. It had also been stated that the project would be scrapped after the January 8th election. Nevertheless, three weeks after the election, the Cabinet spokesman for the new government has stated that the project would be allowed to continue, which perhaps confirms that upon a fresh evaluation being carried out by the new government, they too have come to the conclusion that the Port City Project was an acceptable and useful venture.



Q   How do you see the economic policies of the Maithripala Sirisena regime?

The new regime has introduced several new economic policies which are currently being implemented, while retaining and implementing some policies that were followed during the past. The economic outcomes and results as reflected in the benign macro-fundamentals as seen by the end of 2014, clearly indicate that the policies followed in the past 10 years or so, have yielded favorable results. At the same time, based upon the pronouncements of the new Finance Minister and his Cabinet colleagues, the new administration expects future economic results to be even better. As a citizen of Sri Lanka, I would be very pleased if that does happen.




QFinally, how would you like to respond to the various other allegations of bribery and corruption that have been made against you by certain quarters?

At the Central Bank, very stringent procedures are followed in an environment of high quality internal controls. Nothing happens without due process and authorisation. I am therefore confident that in all our policy advice activities, payments and investments, the applicable authorisations and procedures have been properly adhered to. Hence before long, the truth will emerge and these revenge-driven allegations would finally come to naught. Nevertheless, the current frenzy of “trials by media”, where sweeping allegations and innuendos are made by various persons which are supported by massive media blitzes before such charges are even informed to the person accused, seems to indicate that what is prevailing is an operation to vilify persons and build up a public hatred towards such persons before they could to prove their innocence.

When I took office as the Governor of the Central Bank in 2006, after 58 years of independence, Sri Lanka’s GDP was only USD 24 billion, with a per capita of just over USD 1,000. But by 2014, just 8 years later, when I relinquished office, it had increased to a robust USD 75 billion, with a per capita income close to USD 4,000.

Unfortunately because of this unprecedented transformation, there have been some politically motivated persons who have been adversely affected and some of them have been on a hate-driven, revengeful attack against me, in order to damage my reputation.