COPE Report Is Due Soon: Is Ranil’s Credibility At Stake?
By Hema Senanayake –October 22, 2016
Hema Senanayake
I am not a mathematician. But I still admit that mathematics is the apex of all sciences including “economic science.” Without mathematics I cannot imagine what kind of civilization this could be. Perhaps, Prime Minister Ranil Wickeramasinghe could better explain about it.
Now, Mr. Gamini Wijesinghe, the Auditor General submitted a certain calculationbased on a certain mathematical principle. He said that if the Central Bank accepts bids to buy government bonds quoted with higher interest rates than prevailing market rates, the government would make a real loss by having to pay higher interest. This is not a nominal loss. This loss can be nominal only if the payment of interest is nominal. But the payment of interest by the government is real. Receiving of interest payments by the bond dealer is real too. There is nothing nominal in this kind of deals.
Subjected to the above mentioned principle, as far as I know, Auditor General calculated the loss to be made by the government by having to incur extra cost on interest as a result of accepting at least Rs. Five billion worth of bonds with higher interest rates maturing at 30 years, offered by Perpetual Treasuries at the bond auction held on February 27, 2015. His calculation of loss amounts Rs.1.6 billion. The loss made by the government by having to pay higher interest rate can be calculated – And nobody can challenge about it. Let me give you a very practical example.
I wanted to buy a car. After making a down payment I needed a loan to buy it. The loan amount needed was $26,000/=. Financial consultant of the car dealers company requested from a few financial institution to submit their quotes to borrow $26,000/= to be paid back in full in 60 monthly installments. One bank quoted to lend the amount at 11% interest per annum and another bank quoted with 4.6% interest rate. If I had borrowed from the first bank I would have ended up paying $ 7,918/= as interest by the time I settle the loan in full. If I had borrowed the same amount at 4.6% rate, my total cost of interest for 60 months would be $3,154/=. Would I have had made a loss of $4,764/= ($7,918-$3154) if I had borrowed at 11%? The answer is yes.
This same calculation is applicable in calculating the loss made by the government in borrowing by having to pay higher interest for Perpetual Treasuries. The only difference is that the calculation is a little bit complex because basically there are two variables involve in the calculation. One variable is the purchase price of a bond of Rs.100 and the other is the quoted interest rate. For an example one Primary Dealer offered to buy 50 million bonds worth of Rs.100 each at a purchase price of Rs.112.01 each. This means that the Central Bank receives Rs. 5,600.01 million and this exceeds Rs.600.01 million than the par value of bonds when the offer is accepted. The yield rate (interest rate) quoted was 9.99%. This has additional benefit because in general the interest rate is paid to the par value of bonds. This simply means that even though the company invested Rs. 5,600.01 million in buying bonds, the company has agreed to receive interest income for Rs.5,000 million only. It means that the effective rate of interest is less than the 9.99% in this example and this is a real example.
