I’m a victim of my own transparency, laments Central Bank Governor Mahendran
By Azhar Razak and Arthur Wamanan
The Governor of the Central Bank of Sri Lanka,
Arjuna Mahendran last week denied any
wrongdoing in the controversial Rs. 10 billion
Treasury bond auction and asserted that he was
ready to face any inquiry to prove his innocence.
In a wide ranging interview with The Nation Gain ,
the governor who acknowledged he is a
Singaporean citizen claimed he had become a
victim as a result of attempting to ensure more
transparency in the activities of the Central
However, given the unusual bidding pattern of
Perpetual Treasuries Ltd. at the February 27,
2015 auction, where the Primary Dealer’s bids
were fairly large amounts and at higher interest
rates (comparative to the total of 26 bids),
questions still remain whether Perpetual
Treasuries Ltd. had exclusive inside information
of the government’s exact urgent funding
requirement at the time.
It has to be noted that following the auction, the
Central Bank accepted four bids of Perpetual
Treasuries – Rs. 250 m (11.5%), Rs. 250 m
(11.75%), Rs. 500 m (11.99%), and Rs. 1,000 m
(12.25%). Further, state-owned Bank of Ceylon
making bidding on behalf of this company,
amounting to a colossal Rs. 3 billion at 12.5%,
and the Central Bank’s Tender Committee also
accepting this particular bid, makes the
transaction look very suspicious.
Following are excerpts of the interview.
Tell us about yourself. A bit of background of
where you grew up, studied, career and how you
obtained Singaporean citizenship?
I grew up in Sri Lanka. I was at Royal Junior
School and then at Royal College. Then from
Royal, I directly went to Oxford in UK. I completed
my Advanced Level in 1977 and got admission to
Oxford in 1978. I did my degree in Philosophy,
Politics and Economics and graduated in 1981.
Then I came to Sri Lanka, Prof. G.L. Pieris who
was like my mentor at Oxford, introduced me to
Dr. Neville Karunathilaka who was the Senior
Deputy Governor of the Central Bank at that time.
I was quite keen to join the bank. I sat for the
entrance exam and on January 1, 1983, I joined
the Central Bank of Sri Lanka (CBSL).
In the meantime, I also worked as an Economist
at the Mahaweli Authority for about a year. I
joined the Central Bank in the Data Processing
Department way back in 1983. The CBSL had the
best IT platform and still does. I was trained in
Data Processing and was involved in the creation
of what is known today as Lanka Clear. At that
time, it was a straightforward project to automate
the clearing of cheques.
That was the first time I connected to Singapore.
The CBSL sent me to Singapore for a month to
study the country’s Cheque Clearing System.
Then I came back and we implemented an
automated system in Sri Lanka.
Then I went for my postgraduate studies in 1985
and got my Masters from Oxford. I rejoined the
CBSL in the Research Department. Then I took a
year off in 1987 to work in the private sector.
I returned in 1988 and was appointed the Head of
the Money and Banking Unit. I worked there till
about 1993. It was a fascinating period as that
was the first time we opened up the Stock
In 1993, since the stock market was booming, I
decided to set up a stock brokering company and
ran it successfully till 1997.I started looking at
markets in Singapore and India. By 1998, we had
closed down our firm.
And then in 2001, Hon. Ranil Wickremesinghe
formed a Government in December. At that point,
he invited me to take over as Chairman of the
Board of Investment (BoI). I was the Chairman
from December 2001 to May 2004 until the
Parliament was dissolved.
At that time, it was difficult to find a job after
being the Chairman of the BoI. I was looking
around and went to Singapore and since I could
not find anything, I joined the Credit Suisse Bank
in Singapore from July 2004.
In Singapore, they have a scheme where after
working there until a point, they invite you to
become their citizen. As part of their national
policy, they encourage people to migrate there. I
accepted that invitation since it was difficult to
say no. That’s why in 2006, I accepted the
That was the time when I was also criticized in
Parliament and heard that the Former President
(Mahinda Rajapaksa) was also upset with me
over certain issues. That was the context in
which a lot of us left the country during that
period. I was accused of helping the LTTE. In
2010, when Sarath Fonseka was standing for
election, I was advised by well informed sources
not to come into the country.
As a Singaporean national, who has taken the
oath of renunciation, allegiance and loyalty to that
country, how loyal are you to Sri Lanka?
Well, I grew up here and my parents are in Sri
Lanka, my father has been a Government servant
for 30 years. So I have strong links in the country
and I am not a foreigner. If you ask my
colleagues in Singapore, China and Dubai, they
will all tell you that whenever I spoke about Sri
Lanka my face always lit up and I used to bring
all my staff to Sri Lanka on off-sites. I would
always consider myself as an unofficial
Ambassador of Sri Lanka since I love this country.
What is your view on the state of the Sri Lankan
economy at present? Are you satisfied with its
performance in the past few years?
I think the economy has grown by about 7% or
thereabout which is a good achievement. I think
the economy could have grown about 8% to 9%.
There are some issues that we have pointed out
in our Annual Report which point out that there is
more work to be done. The whole economic
model so far has been dedicated on government
borrowing. And we have reached the limits of that
As a result, the government has in the last few
years resorted to borrowing by stealth. In other
words, instead of borrowing on the government’s
balance sheet, they borrowed on bank balance
sheets. The BoC raised a billion dollars. DFCC
raised 200 million dollars and NSB raised a billion
dollars. That was effectively money for the
That type of model cannot continue. That is why
this year we are trying to restrict our foreign
borrowings as much as possible.
We have to now look at how we can grow our
Revenues were 19% of GDP in 2004. Today they
are 10.3%. That is a massive collapse and we
have to fix that. The good news is, we were there
fairly recently, as recent as 2004 and the same
people who ran that government from 2001 to
2004 are available to revive that.
We have to re-look at concepts like the Value
Added Tax (VAT). Is the VAT appropriate for a
service economy like Sri Lanka? The whole
concept of value addition is I think inappropriate
for an economy like this because value addition in
a manufacturing process makes sense but not in
a service economy where we mainly look at
logistics, tourism and financial services.
It’s been nearly five months since you took over
as the Governor of the CBSL. How would you
describe your new role so far?
Well it’s like coming back home. It was my first
formal job, and it was very heartwarming for me
to come back. In fact, two of the Deputy
Governors, Mr. Ananda Silva and Mr. P.
Samarasiri, both joined the CBSL in my batch in
1983. So it was almost like coming a full circle,
and they welcomed me very warmly.
I knew the institution, the people and the system.
I have been observing them from afar, and
coming here was like a plug and play situation. I
was able to restart from where I left off.
There were issues that we had to resolve in the
last five months. First issue was the previous
Governor had planned a bond issue in January
2015 for US$500 million, which was absolutely
critical because there was a repayment of a bond
that had been issued five years prior, which was
coming up for repayment.
Given that the new government had come into
office, we couldn’t issue that bond because the
investors wanted time to understand what the
new policies of the new government would be etc.
That took time. Alternatively, we had to draw on
our reserves for the repayment which was
something that should have been avoided, but we
couldn’t. The currency also weakened a bit during
that period, but we managed to hold it since our
reserves were still strong.
In fact, one of the first things I did, after I was
appointed, was to go with the Finance Minister to
Washington where we met with the
representatives of the IMF and the World Bank
They told us that there was nothing wrong with
our Foreign Exchange position and that there was
no need for additional borrowing. But, we
explained that there could be a climate of political
uncertainty until the General Election, and we
explained our policies regarding greater
transparency and commitment to seeing that the
economy does not develop on a slightly lopsided
basis where there is too much emphasis on
government infrastructure. We wanted the private
sector also to flourish. We made our
presentations to them.
I also took the opportunity of meeting investors
who had invested in our previous bonds. As you
know, over the years we had two US$ 500 million
bonds in 2007 and 2009. Then in 2010,11 and 12,
we did one billion each year. In 2013, a lot of
banks such as DFCC, BoC and NSB raised about
of 2.2 billion dollars of bonds. Last year, we did
another US$ 1.5 billion in sovereign bonds.
So I specifically took time off to meet the
investors in the East Coast and West Coast of the
US and apprised them of the new policies of the
government and assured that Sri Lanka would
continue to grow and urged them to visit the
The other point is that when I looked at the
issuance of Public Debt, I found that there was
this reliance on private placements in the
domestic Treasury Bond market and first of all
this was not in accordance with the Public Debt
manual which states that whatever that are
raised through Bond issues should, as far as
possible, be raised through auctions. When you
look at major Bond Markets around the world,
that is the norm! You go for auctions as far as
possible, since that ensures transparency and
also remember that the Bond Auction is a
mechanism for establishing what the market’s
expectations are of the future growth, future
trajectory of inflation what that implies for
interest rates and etc.
You get a reading from the market on what the
interest rate at a particular time should be.
That’s the key element of an auction. Whereas, if
you do it through private placements, it’s a
bilateral deal between the buyer and seller and
that rate of interest is not representative of the
In your estimate, how much of bonds were raised
through private placements in the last few years?
Well, as the Prime Minister has said, Rs. 2.7
trillion worth of bonds were placed in several
private placements in the three years 2012, 2013
Is that figure accurate and what was the
proportion of it out of the total funds raised?
Yes I think broadly it is correct. And of course in
terms of the auction, it was a very small
percentage of that. I’m not trying to make a
political statement here. But, we could have
raised more through the auctions.
Well, in contrary to your view that raising funds
through private placements is not in accordance
with the Public Debt manual, the former CBSL
Governor Cabraal has described the Direct
Placements to Primary Dealers after conducting an
auction, as a time-tested practice. Your
I disagree completely with that. It is not a time
tested practice except maybe in Sri Lanka during
the last 10 years of the CBSL!
It flies against all the norms that we have seen in
all the other countries where the maximum
permissible level for this so-called tap issues
(they call it tap because you can turn it on and
off) after an auction is maximum 10% of the value
of the auction.
If you sell 10 billion worth of bonds in an auction,
you can sell maximum of one billion through
subsequent tap issues until the next auction is
held. I disagree with that. I think it’s not a sound
So do you mean to say that Direct Placements are
a relatively new phenomenon?
You must remember that the whole issue of
raising bond securities through auctions started
fairly recently. We’ve been having Treasury bill
auction for a much longer time. So the extension
into the bond market (securities of more than one
year), is relatively a new phenomenon.
Second point is the structure of the market has
evolved in recent years. One of the key
determinants has been the fact that the
expatriate population of Sri Lankans has grown in
the last decade. There has been a migration of
talent from Sri Lanka in the past years during the
war and all.
Sri Lanka today is in a small club of countries
who has large expatriate populations. Others that
come to mind are Philippines and Mexico. This
basically means that there is a fair amount of
interest in amongst our expatriate population to
invest in Sri Lankan Government security.
And that too has grown in recent years, which is
the other aspect I was looking at since I had
worked overseas, I saw this demand and said
why don’t we try and attract them to invest in
these securities and there was no better way than
having regular auctions. Because that then
signals the market rates of interest and you know,
shows that out to the rest of our communities
You have been rocked with the Treasury bond
scandal within days of assuming office. We would
like to hear your version of the whole saga?
We took a decision at the Monetary Board on the
23rd of February to have the first auction under
my governorship. Now this was also coinciding
with large requests for funds from the Ministry of
Finance. You must remember that the Public Debt
function of the Central Bank is an agency
function, set up under the Monetary Law Act. We
act as agents of the government.
This is not our intrinsic activity. Our intrinsic job
is to formulate Monetary Policy to enable
adequate liquidity in the market. Public Debt
issuance in other countries is handled by the
Treasury. But, here it is handled by the Central
So, as an agent of the government, if the
government orders me, that on the 2nd of March
2015, I should deliver Rs. 13.5 billion, into the
account of the Secretary to the Treasury, I have
to do it. I cannot question that. It’s an order.
Generally, when the Treasury requires money, what
is the length of notice that Treasury ought to give
the Public Debt Department of the Central Bank?
They give us a month’s notice.
So you knew the requirement beforehand?
Yes, but what I noticed was in the weeks leading
to the auction, is that the amount raised through
private placements was diminishing. In January,
we raised a considerable amount, but in February
it started declining. When I looked at the
projections for March, there was a significant
bunching up of government repayments due in
March. Over Rs. 100 billion had to be paid in
March and we managed to raise one or two
billion rupees through each of the private
placements, which was insufficient when you look
at the degrees of magnitude.
I had anyway told my colleagues at the Public
Debt Department (PDD) that we should look at
the auction way methodology of doing this and
the Monetary Board agreed to that and we
decided to go for a 30 year bond.
What were the circumstances that led to this
sudden increase in the government’s borrowing
The Government gave a 40% increase to public
servants and the expectation was that the
government borrowing was going to shoot up.
Anybody who read the Budget (presented on
January 29) and has the finance knowledge would
understand that the borrowing requirement would
go up. In order to see that interest rates were
well behaved, I said we will go for the longest
tenor, the 30 year bond first, so that we anchor
the interest rate.
As you know, the yield curve was upward sloping,
so the interest rate for the long term tenor has to
be higher. If you lock the longest one, then the
entire yield curve gets locked. Whereas, if you
went for the short term tenor, the danger is that if
the interest moves up, the whole curve starts to
move up and you wouldn’t want that to happen in
a situation where the traders are expecting the
government to keep borrowing more and more
And also, at the end of the tax year, which ends
on the 31st of March, you find that revenues tend
to be weak around that period. Generally February
and March is a weak period for revenues because
1st of April is when the new tax year starts and
when taxes start coming in again. So there is a
shortage of government finance in this period and
borrowing has to be high on a seasonal basis.
Why did the PDD of the CBSL advertise to raise
only Rs.1 billion instead of the actual
I think the PDD, going on their previous practices
advertised for Rs. 1 billion worth of bids at the
auction. I think their expectation was that they
could raise the balance through Private
But, when we came to that Friday (February 27,
2015), they had not been able to raise more than
about Rs. 3.5 billion out of the Rs.13.5 billion
So, there was a Rs.10 billion gap on Friday
afternoon and we had to deliver it on Monday
morning to the Treasury. And there was no way I
could see where that Rs.10 billion was going to
come from. That’s the simple story.
Why do you think the PDD couldn’t deliver on the
requirement at the time?
They couldn’t find people to give the money. This
is why I said, the earlier system was not working.
What involvement did you have in the activities of
the Tender Committee?
When the auction was held, we found that there
was Rs. 20 billion worth of bids. The Tender
Committee sits separately and I wasn’t part of
the committee. But I told them the requirement
and that it was an order from the government.
Was there a communication lapse of sorts where
the PDD was not aware of the amount that they
had to raise?
No. They knew. When it was advertised, they
could have legitimately expected that they could
raise through private placements. I don’t blame
them for that.
Has this happened before?
Not to this magnitude. There might have been
slippages of Rs. 1 or Rs. 2 billion, but not 10
So when I discussed this with the PDD, we came
to an agreement that there was a need for Rs.10
billion to be raised.
Did the CBSL at any point indicate an interest
rate in the range of 9.75% to 12.5% to the
On Wednesday, February 25, we put a notification
on our website saying that the interest rate
payable on this bond would be 12.5%. That was
public knowledge. On Thursday, the same
advertisement came in the newspapers. Nobody
ever said it was 9.75%. When people say we
indicated 9.75% it’s a complete nonsense. It
never was the case.
Why was the rate decided at 12.5% then?
That was basically on historic levels of interest
rates. In May 2014, at the previous 30 year
Treasury Bond auction, the advertisement said
13% and the accepted level was 11.75%. We
brought it down to 12.5% for this auction and the
accepted level was 11.73%. That is set in terms of
the expectations of the market and so on.
We had a low interest rate environment last year
and even the Central Bank’s indication prior to the
February 27 auction was that this trend will
continue. However, given that the Tender
Committee accepted bids even at 12.5%, it seems
Central Bank has adopted a sudden change in
In the secondary markets, there may have been
an artificial depression in the interest rate
between September 2014 and December 2014.
That is because the bulk of the tax revenues
come to the government at that time. That
depresses interest rates and remember last year
the credit growth to the private sector collapsed.
So there was no demand for funds and that’s
why interest rates collapsed.
But, by the end of the year and particularly after
the elections, credit growth started growing again
and people started borrowing. And so interest
rates started moving up.
The three-member committee says that the
bidding pattern of Perpetual Securities and
securing 50% of accepted bids was very unusual.
The committee has recommended a full scale
investigation by a proper government authority.
Has any investigation started to your knowledge?
The Honorable Speaker of Parliament has asked
the Committee on Public Enterprise (COPE) to
investigate this matter. COPE is currently
investigating this. And in the Central Bank, we are
now gearing ourselves to examine the findings of
the three member committee and of the COPE
when it presents its report on June 12. Then we
will conduct our own internal investigation on this
At the same time, the Honorable Prime Minister
has asked his Ministry, the Ministry of Policy
Planning and Economic Affairs, and the relevant
investigative agencies are to look into this matter.
I think there is a committee headed by Justice
Harsha Soza to not only look into this matter, but
other issues in the financial sector.
The Committee has also asked the Board of Bank
of Ceylon to initiate a full-scale Investigation and
if necessary, a forensic audit into the activities of
the Dealer room of BoC. Given the fact that BoC
falls under the supervision of CBSL, what is the
progress of the investigation?
From the Central Bank, our Director of Bank
Supervision is aware of what the BoC is doing
and we are monitoring them. No sooner the
findings are released, then we will factor that into
our supervisory activity of the BoC.
I have no timeline as yet, but I think the COPE
investigations are critical since that is the highest
body at the moment looking at this and then the
Harsha Soza Committee’s findings will also be
looked at. So there are multiple agencies that are
looking into this to give us a broader view as
possible on anything that went wrong and
remedial action that has to be taken.
Would the Central Bank, as the regulator,
investigate the transaction between BoC and
First of all, BoC themselves will have to come up
with their findings. We haven’t got involved in any
of this so far. It’s been driven by the Ministry of
Policy Planning and Economic Affairs and the
Ministry of Finance.
Even when you were appointed the Governor on
January 15, there was a barrage of criticism that
your appointment could lead to a conflict of
interest as your Son-in-Law controlled Perpetual
Treasuries, a primary dealer. Given that this was
the case, do you think it was ethical (though
legal) for the company to have involved in a
transaction of this nature?
Well, as I have said this before, my Son-in-Law
had resigned from the company. He has other
businesses which he is attending to. So there is
no conflict of interest in the sense that he did not
personally own this primary dealer company.
But it is a family-owned business where he may
still enjoy influence over the affairs of the
Well, it is not my family! It is a family of a person
who married my daughter. That doesn’t mean
that I have any personal interest in this. And
provided the safeguards are there, if there was
any issue regarding this company, I recuse myself
from being involved in the discussions and I left it
entirely to the PDD to handle this matter. So I
think from my perspective, that it is adequate
safeguard against any influence.
He himself offered to resign from the company
and not to get involved in this area of activity.
And I can vouch safe for that there is a
professional manager, who is running that
company, and he has testified before the
Committee and before the COPE and people will
realize that he is mature and able enough to run
that company independent of any pressures from
Let’s be clear about this. Why would I do such a
silly thing, given that all these allegations have
been made from day one?
In addition, I have various relations in the
Maharaja organization and other people. So there
will always be conflicts of interest for anybody
who is sitting on this seat. My point is that when
the previous governor took office, there was a
question about Gold Quest and his involvement in
the company. That was dealt with in one way or
Since the turn of events and now that you have
resumed duties as the Governor, after that brief
leave you took to facilitate the inquiry, how hard
has it been for you to assert your credibility both
within and outside the Central Bank?
Well, to the extent that we were able to raise USD
650 million last week from the international
markets at a record narrow spread of below 400
basis points over the corresponding US Treasuries
is I think testimony to the fact that this has not
at all impacted the reputation or the standing of
the Central Bank of Sri Lanka in the international
markets. Not one adverse comment has been
made about me or the CBSL in any international
press to date!
All the comments are basically politically
motivated by local commentators who have made
this a big issue when the Supreme Court of the
country has exonerated me and the Central Bank
of any wrong doing. The committee appointed by
the Prime Minister has exonerated us. Let’s see
what the COPE says and I rest it there. I’m not
going to make judgments about my own actions.
Due to this scandal being splashed in the media
and tarnishing your reputation to some extent, was
there any point of time you considered resignation
which could have controlled the extent of damage
it caused? Or did you not consider quitting
because you thought it will amount to accepting
Exactly. Resignation would have amounted to
accepting guilt! Secondly, I took up this job with a
view to performing certain tasks, and for me to
abandon ship just on frivolous charges would
have been dereliction of duties.
The Annual Report of the Central Bank by statute
had to be presented to the Minister of Finance on
May 1 every calendar year. We had to work
towards that. I took leave, and as soon as I came
back, I made sure that we presented the Report
on the due date.
We also had to see that the government’s funding
was met. We have managed to do that to date,
until 650 million issuance last week, we have not
raised any funding in the international markets.
That’s a significant achievement.
Last year by this time, the government had raised
1.5 billion US dollars through two bond issues.
Without doing that, we managed to raise money
in the local bond markets!
To me that’s an unsung achievement of the
Central Bank and I give full credit to the officials
of the PDD that despite all this adverse
comments etc, they have continued steadfastly in
their work and have managed to raise record
amounts of money in the local bond market.
The former governor of CBSL in a recent statement
said that post-general elections, the new
Government must appoint an Independent Special
Prosecutor who must be mandated to inquire into
all aspects of this scam. He says if such an
investigation is done, that investigation will reveal
that a topmost person of the current Government
is also directly involved, given the intense effort at
that level to somehow conceal this “Bondgate”.
What is your response?
I don’t want to respond to the previous governor.
I have the greatest respect for him and he is
facing several investigations currently and I don’t
want to comment on this. My point is, let us look
into the future of this country.
I have not concealed anything. We are
transparent. In fact, I’m a victim of my own
transparency. If I had stayed with the private
placement methodology, none of this would have
happened and nobody would have known. This
company which was linked to my son-in-law
would have done this same amount of transaction
through a private placement and nobody would
have known about it. That is all I can say.
Well, like I said, it has become a political issue
and it is unfortunate. The foreign media has not
taken this issue seriously at all. It’s been a local
issue. I think it is partly because, when you
implement change, there are always people
affected by that change. This government has not
been scared to do this. I have experience on this
in 1993 when we liberalized the stock market.
At that time, shares could only be owned by Sri
Lankans. We opened it up for foreigners and
immediately, there were protests particularly from
the private sector from Directors who were
worried that their shareholdings would be diluted.
I’m not a stranger to this type of controversy and
I don’t claim credit for this. It is the Prime
Minister and the Cabinet who have seen the need
for a change.
On the financial sector consolidation initiative,
what were the findings of the Committee’s Report
and why is the report still not made public?
I think it has been circulated for comment from
the various Ministries and you will see a final
version out fairly soon. There were some
preliminary comments that came out suggesting
that it should be a more voluntary approach
rather than a forced approach. That is the key
changes as I understand.
What does it recommend to do with the ailing
Traditionally, when you have an ailing financial
company, the Central Bank goes in and
restructures it and finds new owners or new
managers and then revives it. That model will
However, if you are going to force good finance
companies to take over bad ones, you are
creating a bit of a hazard for the good finance
companies. That I think was the view of the