Bond Issue Fiasco: Government Incur Loses!

By Hema Senanayake –May 17, 2015

Hema Senanayake

Does the government incur any loss? This question has become the ultimate question that needs to be resolved in regard to the alleged bond issue scandal that involved with the Governor of the Central Bank of Sri Lanka (CBSL) and his son-in-law. This can be technically resolved. The purpose of this article is to do that.

Over this question, now the government is divided into two groups. One group says that nothing wrong has happened. The other group says that something has happened but the government is not incurring any loss on interest payments. What is common for both groups is that they are united in arguing the government is not making any loss because the government needed money urgently to meet payment obligations inherited from the previous regime and hence had to increase the borrowing limit from rupees 1 billion to 10 billion and it is quite usual that interest rate goes up due to the increased demand for money by the government.

If the Governor of CBSL upholds the above view he immediately should resign from his position because he has never understood how a central bank functions. If the Minister of Finance Ravi Karunanayake upholds the said view he must be forgiven because he is an accountant by profession, but he needs to enlighten himself on the subject if he wishes to be a good Minister of Finance. I guess both hold the above view.

Let us get back to our analysis. Any loss could be possibly have incurred not by increasing the issue of bonds from 1 billion rupees to 10 billion rupees but by having to pay higher rate of interest exceeding what is known as CBSL’s indicative price or rate. When the bond issue was declared the CBSL indicated that the targeted borrowing rate (indicative rate) was between 9 to 9.5%. Hence, if CBSL accepted any bids over 9.5% interest, the government has to pay higher interest than what it expected to pay. This point is very clear. Now on February 27, 2015 the CBSL accepted bids up to 12.5% and it was an increase of at least 2% of interest rate. This increment of the rate of interest can be justified if CBSL had no other alternative to raise money badly needed for the government by that time. The government says that was the case and hence the government is not incurring any loss – And this perception is grossly inaccurate and misleading. Why?Read More