Recommendations of the Commission on ‘bond scams’: some comments

By Usvatte-aratchi-January 28, 2018, 9:25 pm 

I was much gratified to read the Recommendations of the Bond Commission, published in this Newspaper on 18th January. It pretty much confirmed what I wrote on 9th January in The Island on ‘Bond scams: ….’ It was so close that even the figure for losses to government from the bond sale on 27th February 2105, which I showed for illustration, was in the same ballpark as the estimates of the Commission. They found, as I did, that the nub of the charges lay in ‘insider trading’ perpetrated by an identified primary dealer. The Commission’s findings also put paid to the false notion propagated by politicians and celebrated by TV channels that what took place was a ‘highway robbery of the Central Bank (maha banku man kollaya)’.

On Jan. 23 the President spoke of ‘a maha banku bandum kara mankollaya’. The Central Bank had no bonds sold in the market. The scandal was in respect of government bonds. The ‘losses’ were in respect of government bonds. Was this a disingenuous trap to smear those that were in charge of the Central Bank? Politicians as well as TV journalists ought to re-think the degree to which they permit their prejudice to mislead the public, throwing good judgment to the winds.

One must question how far the qualifications of a candidate for this position can be stipulated in the law; one must leave something for the discretion of persons with high levels of responsibility. John Exter, in his report on the appointment of a Governor, used pretty much the same language as the Commission: a person of competence and unquestioned integrity (quoting from memory). The book on central banking by de Kock (M. H. de Kock, Governor of the Reserve Bank of South Africa?) that the Commission has quoted was written some time before the last European war (1939-1945) and we read it as undergraduates, in1956 and I never went back to it. Nor have I seen it cited it in the recent literature on central banking. The book was well written and read well but was short on deep insights. We were so relieved when the Radcliffe Committee Report on banking came out in 1957/58. We were already familiar with the Macmillan Report of 1931; but that had been before a quarter century of creative change in central banking. The Radcliffe Report helped us to understand many problems which de Kock had left unanswered. Allen Binder (Princeton and Fed) or Charles Godhart (LSE and the Bank of England) or Bimal Jalan (Governor RBI, whose book, I am familiar with only from reviews) would have been far surer guides. The Commission’s comment that ‘There have been 22 piecemeal Amendments to the Monetary Law Act since1949, but these Amendments have only addressed specific issues’, is not congruent with facts. The Monetary Law (Amendment) Act, No. 32 of 2002 constituted a major revision of the MLA of 1949. It revised the objectives of the Bank, established a Payment and Settlement System and 28 sections of the MLA (1949) in all were amended. Whether these amount to addressing ‘specific issues’ alone is a matter of judgment.

Two of the most significant observations made by the Commission are that our capital markets are governed by the Registered Stock and Securities Ordinance of1937 and the Local Treasury Bills Ordinance of 1923. These are wholly inadequate. I was astonished by that revelation. When the Rajapaksa government and the Sirisena government spoke of a Finance Hub in Colombo, they must have been either joking or out of their minds. Sometime in 1979 or 1980,I was in charge of a small group who provided, on request, Technical Assistance in matters of Public Finance. One morning someone from the Chinese Embassy came to see me to request that UN mount a programme of Technical Assistance to draft legislation on capital markets. (I was not unaware that the Shanghai Stock Market pre-dates 1940.) I informed him that we did not have the expertise and that I would talk to my superiors and let him know whether we could seek expertise from outside the UN. I spoke to two reputed firms of lawyers in Manhattan and found that their fees would exhaust my total annual budget a few times over. Eventually, the Chinese government hired lawyers from outside. That is the degree of care that a government, serious about financial sector reforms, gives to the relevant laws. We are all in debt to the Commission for their wise observations.

Major amendments to MLA were not all that Governor A.S. Jayawardena worked for in the Re-structuring Project 2002-2003. All senior officers of the Bank partook in the exercise and there were many seminars and visiting experts who helped the Bank to formulate their ideas. Taken all together, it was a period of excellent training and learning. W. A. Wijewardena and Ranee Jayamaha were leaders in this enterprise and know more about it than anyone else. I was a Consultant on Public Finance and Economics at that time. (The President was also the Minister of Finance; that, I find, is a bad idea, which President Rajapaksa emulated and, I hope, President Sirisena would avoid as it creates an anomalous situation where the President would advise himself as to who should be appointed as Governor of the Central Bank!) The Governor tried hard to convince the President the Public Debt Department and the EPF Department should cease to be part of the Central Bank. The reason was that the objectives of the Public Debt Department (to minimize interest cost to government) and of EPF Department (to maximize interest earned by EPF) were inherently in conflict in themselves and fundamentally antagonistic to Central Bank policies to achieve macro-economic stability. Now, in addition, the Bank has had to suffer the opprobrium of association with crooked dealers in capital markets. Trade Unions, in particular, as in 1958 when the EPF Act was adopted, opposed the proposal to move to EPF from the care of the Central Bank on account of the unquestioned integrity of the Bank. Now that that Teflon cover has been blown and that EPF has functioned for 60years under the care of the Central Bank, it is time for Trade Unions to manage their members’ accumulated savings. Who would take better care of one’s wealth than the owner herself? The Public Debt Department manages the debt of the state as agent of the government. That arms’ length arrangement creates problems for the Central Bank and offers no advantages to government. It is wise to leave the Central Bank alone to manage monetary policy and safeguard the banking system. (It is odious that the Central Bank, in the person of the Governor, talks for the government on economic growth, a practice which began with Governor Cabraal. It is not his business but stability of prices and the banking system is. In any case, the Central Bank does not have the instruments with which to leverage the rate of economic growth. Spokesmen for the government must be a dozen a dime.) One would not consult Keynes’ ‘General Theory ….’ about economic growth any more than Richard Nelson’s ‘Sources of Economic Growth’ about stabilization. All the literature that we and visiting experts produced 2002-2004must lie with the Bank.

Reading the Report of the Commission, one recalls the petition which three citizens of this country, with the help of a leading attorney in Colombo, made to the Supreme Court as early as March 2015, in which they requested the Court, among other things, to direct the Monetary Board to carry out an independent inquiry by a panel of professionals well versed in the rules, the systems, procedures and processes applicable to public debt management, under the supervision of the Court. The petitioners in paragraphs 21to 30 of the petition articulated the reasons for requesting the Court for do so. The reasonare pretty much the same as now presented in the Report of the Commission. The Supreme Court after hearing Counsel for three days denied the requests of the petitioners. Had the Court decided to permit the petitioners to proceed, we would have got to the bottom of the scam a good two years earlier and certainly at less cost and even less misinformation doled out to the public.

The Commission recommends that ‘… consideration be given to recovering the costs of this Commission of Inquiry from …’, the alleged wrong doer. I think this is an unwise idea. What if at the end of an inquiry the suspected allegations came out untrue? Would the government then come under obligation to compensate the accused his costs? What if only 30 percent of them were true? The Commission was not a court of law and they had no power to find any one guilty. What is just in asking an errant dealer to pay for a service that it did not buy nor had control over the manner in which it was provided? Will a court hold that as fair and just? Besides, it looks as if essential functions of government were being outsourced to private litigants.

What would have been highly desirable is for the Commission to have kept accounts of how much was spent on the work of the Commission. In 1969, I was appointed by Minister C. P. de Silva as a member of the Gal Oya Project Evaluation Committee with four others, one of whom, B. H. Farmer of St. John’s College in Cambridge and a renowned geographer, was Chairman. At our first meeting, on the initiative of Farmer, we decided to ask our young Secretary (Tissa Devendra, CAS) to keep an account of all our expenses. Public funds were being spent on the work we undertook. At our last meeting we received a statement as requested, thanks to the Secretary and the cooperation of the Gal Board accounting office. (I reproduce it here from the Report, Ceylon Sessional Papers, 1969.) It was our hope that Commissions and Committees that came after us would emulate that salutary example. Hopelessly vainly. This present Commission, with a member who was an experienced accountant and auditor, would have done itself proud had it given the public a first-cut estimate of their expenditure. It is still not too late to do that. After all, they spent public money.

Leaving that aside, I, for one, am very grateful to the Commission for the speed with which they completed the Report and the clarity of statement of recommendations. I had feared that their Report would suffer the same fate as many of the several reports on the Welikada Jail Murders had. I am grateful to the President and his office for putting it out to the public that soon. It is not too late to improve their performance on that score. I look forward to the debate in Parliament on the Report and hope that MPs would discuss the problems uncovered and solutions recommended by the Commission and not resort to fisticuffs which is culturally their forte`.

It would be very useful, if a month after the issue of the Report in Sinhala and Tamil, the President’s office were to commission a Survey to find out how many people had read it, at least in part.