A controversial bond auction, with claims of insider dealing, has caused tensions in the governing coalition and damaged its reputation, reports Neville de Silva

It happened nearly two years ago. But the din it caused has not subsided, despite strenuous efforts by the leading party in Sri Lanka’s national unity government to divert public attention from what threatens to be a continuing controversy.

At the heart of the issue is Prime Minister Ranil Wickremesinghe’s United National Party (UNP), and his nominee as governor of Sri Lanka’s Central Bank. Soon after the presidential election last year that brought Maithripala Sirisena to power, Wickremesinghe persuaded him to appoint Arjuna Mahendran, a college mate and close associate who is of Sri Lankan origin, but now a Singaporean citizen.

Hardly had Mahendran occupied the governor’s chair than there was uproar in financial circles. The cause: an apparently routine government bond auction, scheduled to raise Rs1 billion ($6.7 million). Sixteen primary dealers affiliated to banks and non-bank private companies were invited to bid, but the way the auction was conducted quickly led to publicly-aired suspicions of insider dealing.

It has now emerged that a day before the auction, in February 2015, the Central Bank governor met the Finance Minister, other cabinet ministers and the Secretary to the Treasury, and agreed the government urgently needed Rs15 billion. The following day, instead of the advertised Rs1 billion, bids were accepted for Rs 10 billion. Dealers who had come prepared to make bids for the original figure were caught unawares. However, one primary dealer, called Perpetual Treasuries, reportedly made a huge profit on the auction.

As the Sri Lankan Sunday Times reported, ‘The CBSL (Central Bank of Sri Lanka) announced that it was accepting bids worth Rs 10 billion at 9.5-12.5 per cent, whereas clients and most primary dealers had made bids between 9.5 and 10.5 per cent, not in the 11-12 per cent range. Only a few bids, including those by Perpetual Treasuries, were made in the 12 per cent range.’

Since Mahendran, the Central Bank governor, has family connections to Perpetual Treasuries, the furore soon spilled from the financial markets into the political arena. The government claimed it needed money to meet urgent payments, but that did not explain why the primary dealers had not been told before they arrived at the auction that the bid amount had now been raised to Rs10 billion. Nor why the government was issuing 30-year bonds, saddling the country with long-term debt at an unnecessarily high interest rate.

All this came less than two months after President Sirisena took office, promising open and accountable governance after the corruption, nepotism and cronyism that permeated his predecessor’s administration. So when the time came to extend Mahendran’s term he flatly refused, despite the support of his prime minister. To save Mahendran’s reputation, if not his own, Wickremesinghe installed the short-lived governor as an adviser in his office, a post he still holds.

A three-member committee appointed by Wickremesinghe cleared Mahendran of impropriety, but suggested a closer look at the activities of the primary dealer. Their findings were questioned, however, because although all three had legal backgrounds, none had expertise in finance or central banking. And all had, at one time or another, been closely associated with Wickremesinghe’s UNP.

Among the loudest to complain were some ministers and MPs from President Sirisena’s Sri Lankan Freedom Party (SLFP), the second largest in the governing coalition. Now the parliamentary Committee on Public Enterprises has found that the former governor of the Central Bank is ‘directly responsible’ for the controversial bond transaction, according to the chairman, Sunil Handunetti, of the Marxist People’s Liberation Front (JVP).  ‘It recommends legal action against him and other Central Bank officials involved in the transaction,’ he said last month.

Despite attempts by UNP members to block the report or water it down, the committee also called for action to recover the state’s losses from the Central Bank officials and private companies. The matter has now been referred to the Attorney-General, Jayantha Jayasuriya. But whatever his decision, Sri Lanka’s ruling coalition has been weakened, with President Sirisena and some of his SLFP supporters angry that the whole government has been tarred by the scandal.

Neville de Silva is a veteran Sri Lankan journalist who worked in Hong Kong for many years in senior roles at The Standard and in London for Gemini News Service. He has been a correspondent for the New York Times, Christian Science Monitor, The Guardian, Le Monde, Asian Wall Street Journal, AFP and other foreign media. More recently he was Sri Lanka’s deputy chief of mission in Bangkok and deputy high commissioner in London

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