Bond Scam: Simple Unstudious Advise Cost Us Heavily!

By Hema Senanayake –November 7, 2016

Hema Senanayake

Ranil Wickeramesinghe’s unstudious instruction did cost Arjuna Mahendranhis career, cost the government to bear losses exceeding Rs.1.6 billion and it cost the UNP its integrity. In regard to the sale of government bonds, Prime Minister Ranil Wickremesinghe told the parliament that, “I insisted on a public auction because private placements have led to corruption and lack of transparency” (March 17, 2015). But Sunil Handunnetthi, the Chairman of the COPE says that there is no such thing call “public auction” in regard to the sale of bonds by the Central Bank.

It is true that there are auctions but they are not public auctions. You and I cannot buy government bonds from the auction held by the Central Bank. It is because auctions are held among the 16 Primary Dealers registered at the Central Bank. Private placements too are done among the same Primary Dealers. Whether it is auction or private placement the bidders are the same Primary Dealers. In auctions and in private placements the necessary transparency is established. Hence the lack of transparency is not a problem in the issuance of bonds. However, this is a system where corruption could exist while having transparency if the top officials are corrupt. Hence, rather than the lack of transparency or corruption, there is one important rule that applies in the issuance of bonds. It is this rule that Arjuna Mahendran had violated taking Prime Minister’s unstudious advise seriously.

Arjuna Mahendran [Photo via his Facebook]

Sunil Handunneththi explained that rule nicely. The first rule in administering the government debt is to have the least cost to the government. It is a commonsense rule but that should be used with an understanding of the future behavior of yield curve. Accordingly the Domestic Debt Management Committee (DDMC) of the Central Bank decided that only 2.6 billion should be accepted from the auction held on that fateful day of February 27, 2015 in order to have the least cost to the government. The balance requirement of money should be borrowed subsequently from a private placement. The balance cash requirement could have been raised from a subsequent private placement immediately with decimal point change of the average yield (interest) rate. DDMC’s decision has duly been conveyed to the Tender Board. It was not heeded. Sunil Handunneththi now explains that the DDMC’s decision has set the basis for the calculation of loss by the Auditor General. It is very logical and excellent basis.

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