Sri Lanka's bond inquiry scandal leaves top leaders shaken

External debts some calling as country's reputation takes a hit

MARWAAN MACAN-MARKAR, Asia regional correspondent

Sri Lankan Prime Minister Ranil Wickremesinghe speaks to the media after giving evidence before the Bond Commission in Colombo on Nov. 20. © Reuters

November 30, 2017

COLOMBO Sri Lankan Prime Minister Ranil Wickremesinghe made unwelcome political history on Nov. 20, appearing before a presidential commission of inquiry into a 10 billion rupee ($65 million) bond scandal that is shaking his government and damaging the country's economic prospects.

 

 

"I have disclosed everything, as we have nothing to hide," Wickremesinghe told supporters as he emerged from the commission hearing after becoming the first sitting prime minister to be questioned at a presidential corruption inquiry.

Wickremesinghe's stance was mirrored on the streets of the capital, where posters quickly appeared describing the leader of the United National Party, the senior partner in Sri Lanka's nearly 3-year-old coalition government, as a "fearless premier." But the coalition may need more than political spin to escape from the bond revelations, which have exposed murky dealings within Colombo's incestuous financial sector.

Details of the scandal have dogged the UNP since it became public in March 2015, two months after the coalition's shock victory in a presidential election. The coalition, which successfully fielded Maithripala Sirisena as its candidate for president, campaigned on a platform of good governance and accountability to defeat the authoritarian and corrupt regime of former President Mahinda Rajapaksa.

But the scandal also has broader business implications, not least because it reinforces a global impression of Sri Lanka as a country where corruption remains rampant. It was a factor in Sri Lanka's fall of 12 places in the 2016 Corruption Perceptions Index, released annually by Transparency International, a global anti-graft watchdog, and analysts say it has complicated the government's struggle to finance foreign debt repayments.

The $87.5 billion economy faces a challenging external debt schedule, according to Fitch Ratings, a ratings agency. Sri Lanka has just $7 billion in foreign currency reserves, and is due to pay more than $5 billion in maturing foreign loans and interest starting in 2019. A "prolonged drought of foreign direct investment," as one economic analyst put it, has not helped. FDI amounted to just $450 million in 2016, down by 54% from 2015.

The bond scandal has shaken international confidence, according to financial analysts, who say foreign investors are unimpressed by the Sri Lankan government's claim that the prime minister and other senior ministers are appearing before the commission as a mark of good governance.

SUDDEN DECISION Sirisena appointed the commission to investigate the sale after opposition lawmakers demanded an independent inquiry, claiming that the bond issue had raised government borrowing costs by more than $1 billion over the two years.

The Central Bank of Sri Lanka rejects those claims, but the government's credibility began to fade after it emerged that the bank had suddenly decided in late February 2015 to raise 10 billion rupees from a sale of 30-year government bonds with a coupon (fixed interest rate) of 12.5%. It had initially advertised an offer of 1 billion rupees with a 9.5% coupon.

Bonds worth 7 billion rupees were snapped up by Perpetual Treasuries Limited, a primary dealer owned by Arjun Aloysius, a son-in-law of Arjuna Mahendran, the then-governor of the central bank. Mahendran, a Sri Lankan-Singaporean banker, was chosen for the top banking job by Wickremesinghe.