3 May 2016Central Bank capital depletion is also a landmine under PM’s feet
Prime Minister Ranil Wickremesinghe, supported by Senior Minister Sarath Amunugama, castigated SriLankan Airlines in a recent press briefing (available at:
http://www.ft.lk/article/538501/SriLankan-debt--landmine--defused--PM). He said that the National Carrier which had made losses continuously for the last seven years accumulating in the process mounting debts now fixed at $ 3.2 billion was a ‘landmine’ planted on the people of the country.
Senior Minister Amunugama would not have been amused by PM’s equating the present plight of the National Carrier to a landmine because he as the Minister of Finance in 2004 was bold enough to name four loss-making State-Owned Enterprises as ‘monsters’ swallowing the nation’s limited resources. He was frank and realistic in his assertion but could not cage in the monsters due to his losing the job set himself on the job.
Senior Minister Amunugama would not have been amused by PM’s equating the present plight of the National Carrier to a landmine because he as the Minister of Finance in 2004 was bold enough to name four loss-making State-Owned Enterprises as ‘monsters’ swallowing the nation’s limited resources. He was frank and realistic in his assertion but could not cage in the monsters due to his losing the job set himself on the job.
Perhaps both the Prime Minister and the Senior Minister would not have known at the time they appeared before the press that the nation’s Central Bank, making losses continuously for three years in succession amounting to a total of Rs. 88 billion and consequently depleting its capital base by Rs. 128 billion, is another landmine that could explode at any time under their feet. Worse, the Monetary Board which had been responsible for those losses had taken a very light-hearted attitude toward them like the management of the national carrier. The Board had argued earlier responding to this writer that losses at the Central Bank were not a problem because the Government at any time could recoup those losses.
The Annual Report of the Central Bank for 2015 which the Monetary Board has just released reports that the bank has continued to make losses for a third year as well
Making profit transfers to the Government when the Central Bank had made losses
This writer, in public interest, raised the red flag one year ago in four previous articles in this series about the danger of a continuously loss-making central bank. In the first article, he questioned the governance of the Monetary Board – the owner of the Central Bank – when it made a profit transfer of Rs. 28 billion to the Government, while incurring a loss of Rs 39 billion in its comprehensive operations in 2013 (available at: http://www.ft.lk/2015/03/02/questionable-governance-when-loss-incurred-cb-has-made-a-profit-transfer-to-government/).
In accounting terminology, comprehensive operations cover both the factors which are within the control of a business called ordinary operations and all other factors which are outside its control. Hence, the impact on a business is to be reckoned by gauging the outcome of the comprehensive operations.
The loss in 2013 was followed by a comprehensive loss of Rs. 22 billion in 2014, but the accounts of the bank for 2014 showed that the Monetary Board had made an interim profit transfer of Rs. 8.5 billion to the Government out of these losses. An institution making losses can pay dividends to shareholders only by running down its capital and that was exactly what the Monetary Board had done in the two years concerned. Thus, the Central Bank’s capital funds which stood at Rs. 182 billion as at the beginning of 2013 was reduced by the Monetary Board to Rs. 81 billion by the end of 2014.
This writer, in public interest, raised the red flag one year ago in four previous articles in this series about the danger of a continuously loss-making central bank. In the first article, he questioned the governance of the Monetary Board – the owner of the Central Bank – when it made a profit transfer of Rs. 28 billion to the Government, while incurring a loss of Rs 39 billion in its comprehensive operations in 2013 (available at: http://www.ft.lk/2015/03/02/questionable-governance-when-loss-incurred-cb-has-made-a-profit-transfer-to-government/).
In accounting terminology, comprehensive operations cover both the factors which are within the control of a business called ordinary operations and all other factors which are outside its control. Hence, the impact on a business is to be reckoned by gauging the outcome of the comprehensive operations.
The loss in 2013 was followed by a comprehensive loss of Rs. 22 billion in 2014, but the accounts of the bank for 2014 showed that the Monetary Board had made an interim profit transfer of Rs. 8.5 billion to the Government out of these losses. An institution making losses can pay dividends to shareholders only by running down its capital and that was exactly what the Monetary Board had done in the two years concerned. Thus, the Central Bank’s capital funds which stood at Rs. 182 billion as at the beginning of 2013 was reduced by the Monetary Board to Rs. 81 billion by the end of 2014.
Monetary Board justifying the capital depletion
