CB governor alleges political ulterior motive in campaign against him
* Slams DEW and Jayaratne
* Defends son-in-law’s primary dealership
* Justifies BoC bankrolling Perpetual Treasuries bids
* Refuses to divulge details of primary dealers’ bids
* Claims economic growth accelerated after change of govt.
By C. A. Chandraprema-May 19, 2016, 12:00 pm
Central Bank Governor Arjuna Mahendran’s term of office ends in June this year. There have been calls from opposition politicians as well as good governance activists for the government to investigate alleged malpractices in the issuance of treasury bonds during his tenure before reappointing him for another term. One of the bond issues was investigated by the parliamentary Committee on Public Enterprises (COPE) but parliament was dissolved just before the day on which the report of the COPE sub-committee headed by D. E. W. Gunasekera was to be tabled inP. In this exclusive interview with The Island, Governor Mahendran contests the allegations against him.
Q. If you look at the front page of The Island today (Wednesday), Mr D. E. W. Gunasekera has called for an investigation into what he refers to as the ‘bond scams’ before your term is extended in June this year. He calls this the biggest scam in Sri Lankan history. Aren’t all these problems due to the fact that you started going in for bond auctions instead of direct placements as was the earlier practice?
A. All I can say is that the Supreme Court has vindicated me in the fundamental rights petition that was filed by Mr Chandra Jayaratne and two others on the same issue. Mr D. E. W. Gunasekera has a very outdated impression of how the economy works. In the modern economy the government can’t manipulate market prices.
One of the issues that I took up after I became Governor was that the determination of interest rates had not been left to market forces. It was being done administratively by the people in the Central bank. The rate of interest should be determined at an auction. That is the way it is done everywhere in the world. The members of the previous regime say that the interest rates under that previous system were lower than at the auctions. But that is beside the point.
My critics are accusing me of arbitrarily raising interest rates whereas the whole purpose of having auctions is to determine at what price the market will provide those funds to the government. The government had to borrow vast amounts of money to pay the salary increases that were announced, both by Mahinda Rajapaksa and subsequently by President Maithripala Sirisena’s government. In the past they were using the EPF, the Insurance Corporation and the state banks to fund the government’s borrowing and artificially set interest rates at whatever level they wanted to. The problem with that system is that firstly, the EPF contributors were being short-changed. They can get a much better rate of interest for their investments if there is an auction. Secondly, the banks who should be lending this money to private borrowers were instead lending that money to the government. In Mr Gunasekera’s scheme of things the government as in a communist state would manage the flow of lending throughout the economy. That system has now been discredited and is only practiced in North Korea. Even Cuba has given up that system.
