According to the media, the Parliament yesterday, 1st July 2023, has approved with 122-62 majority the resolution for granting the authority to the Minister of Finance, Economic Stabilization and National Policies, to implement a domestic debt optimization (DDO) to restore the sovereign debt sustainability.

However, official contents of the DDO considered under the resolution are still unknown to the public except the PowerPoint presentation made by the CB Governor to the Cabinet on 28 June 2023.

The purpose of this article is to shed some light on how the EPF has been victimized by in the Central Bank functions of debt management, monetary policy and fiscal agent and to call upon an independent inquiry before implementing the DDO to victimize the EPF again in a discriminatory manner.

Highlights on DDO – CB Governor’s PowerPoint presentation

• Only concepts on DDO relating to Treasury bills held by the Central Bank, Treasury bonds held by superannuation funds and foreign currency debt in Sri Lanka Development Bonds  (SLDB) and Foreign Currency Banking Unit (FCBU) have been presented.

• Any amounts involved in those debt categories or modalities or financial impact on those creditors/investors were not presented.

• Debt in Treasury bills and Treasury bonds as at end of 2022 was Rs. 4.1 tn and Rs. 8.7 tn, respectively, as at end of 2022. However, the amount of debt in SLDB and FCBU are not indicated. 

• The DDO in Treasury bills is limited to what is held by the Central Bank, i.e., 62.4% at the end of 2022.

• The DDO in Treasury bonds is limited to what is held by the superannuation sector. The EPF held 36.5% of Treasury bonds at the end of 2022. The EPF’s holding of Treasury bonds is around 90% of its total investments. Further, any indication of the holding by ETF and other superannuation funds was not revealed.

• Therefore, the Parliament has approved the DDO resolution without any knowledge on the exact debt amounts involved, the legal process and its financial impact on debt holders covered.

How EPF members have been punished for debt mismanagement

The Monetary Board is the manager of the funds belonging to the EPF. At the same time, the Monetary Board is the authority for the monetary policy, government debt management and fiscal agent since 1950.

Therefore, the inside information shows that the EPF has been used as the conduit by the Monetary Board/Central Bank to carry out all three national functions under one roof or conglomerate at a cost to the EPF.

Some of devices used are listed below.

• The forcibly use of the EPF funds for private placements of Treasury bonds for funding the government with the objective of the lowest cost and risk. An examination of the Auditor General conducted under the section of 43(2) of the Monetary Law Act covering the period 2008-2015 is available with the relevant authorities and some evidence was produced at the Presidential Bond Commission 2017. Details on individual placements of each bond are available in the report. This will help estimate the amount of bonds dumped to the EPF to raise funds at the lowest cost and risk.

• The modus operandi followed by the CB authorities was to announce bond auctions for small amounts like Rs. 1 bn or 2 bn in irregular manner and have a forced bid for the full auctioned amount from the EPF at a very low directed yield. Then, other bids are rejected and the placement window is opened for raising balanced funds from the auctioned bond as well as the re-issuance of any other bonds preferred by the dealers. The evidence is available that the the EPF was given lowers yields than yields given to others. As a routine, the government was pre-funded through the placement window. As a result, funding the government was a convenient job for the debt manager while killing the market development and fiscal discipline. 

• Private placement window was simultaneously used for the control of market interest rates or the yield curve for the monetary policy requirements. Leading monetary policy economists of the Central Bank including the present Governor testified at the bond commission that the private placement window was a powerful instrument to control interest rates in the economy. Therefore, this is simply the use of debt management for the monetary policy in violation of the relevant provisions of the Monetary Law Act. Private placement is a debt instrument and not a monetary policy instrument. As the private placement window was dominantly used on the EPF, the monetary policy was effectively run trough the EPF. The present CB Governor has resumed the private placement window for same purpose of interest rate control. The present President who was dead against the private placements in 2015 in good governance context is now silent on the practice.

• In early 2017, the Monetary Board permitted the EPF to deposit its excess funds at the CB’s overnight standing deposit facility for a return until the next auction of the government securities. However, the EPF is not an open market operation participant under the monetary policy. Therefore, this is an unlawful attempt to use EPF funds for auctions of government securities.

• In certain periods, the Monetary Board conducted its monetary policy open market operations through government securities borrowed from the EPF at a payment of a fee. This is against the Monetary Law Act that provides for the Central Bank to hold a short-term portfolio of government securities and to issue own securities for this purpose.

• How the EPF was used as the financing conduit for driving the stock market and bond market is not a secret to the Monetary Board. In certain instances, high quality investments of the EPF were sold to foreigners to raise foreign currency for the foreign reserve under the national monetary policy of the Monetary Board.

Concluding Remarks

• The Presidential Bond Commission 2017 recommended a forensic audit on private placements. However, relevant authorities have not taken any action so far.

• A major cause for the present problem of domestic debt service burden is the arbitrary monetary policy implemented by the present CB Governor through red-hot interest rates on government securities around 30% in 2022 and 2023 so far. There is no macroeconomic rationale of such a monetary policy in a crisis economy caused by a supply side collapse.

• In 2022, 24 bond auctions have been conducted to raise Rs. 2,377 bn at overall weighted average yield of 21.24% with an average maturity of 5 years. Only four Treasury bond auctions were held in 2023 so far to raise Rs. 368.4 bn at yield rates around 28%-29% whereas the primary market has now collapsed after the introduction of Treasury bond auctions in February 1997. Further, nearly Rs. 9,948 bn through Treasury bills was raised at an overall weighted average yield of 25.21% at 52 auctions. In addition, nearly Rs. 3,472 bn has been raised so far in 2023 through Treasury bills at around weighted average yield rates of 25%-30% at 26 auctions. Therefore, the present CB Governor is the key individual responsible for the domestic debt unsustainability at present.

• In fact, he is responsible for foreign debt unsustainability too because his has been the front line decision-maker on issuance of all sovereign bonds, SLDBs and currency swaps solely for the purpose of the foreign reserve management of the Central Bank. He has served as the Chairman of the Foreign Reserve Management Committee.

• Therefore, it is the monetary policy that is responsible for the present debt unsustainability where the present CB Governor managed the monetary policy for more than a decade.

• The mandate of the Domestic Debt Management Committee (DDMC) of the Central Bank is to follow “a market-based strategy by considering market conditions, market appetite, monetary developments, inflation, government cash flow needs, the maturity profile, risks in the debt portfolio, etc.” https://www.cbsl.gov.lk/public-debt-management. Therefore, all those DDMC members have failed in their public duties. However, many were trained by the World Bank regular debt sustainability programme.

• However, the EPF is again victimized through the DDO for domestic debt unsustainability proposed by same officials including the present CB Governor. He and Secretary to the Treasury and several senior CB officials who were involved in debt management and monetary policy and enjoyed with high ranking IMF positions had the opportunity to resolve the debt unsustainability problems well in advance with the help of the IMF, especially under two latest IMF programmes 2009-12 and 2016-20. In fact, nobody cared for implementing the Active Liability Management Act that was passed in 2018 for debt restructuring purpose. However, the Monetary Board unlawfully used the additional 10% borrowing limit permitted under this Act to raise more debt to finance the budget deficit.

• Therefore, it is in the interest of both public and EPF members to conduct an independent inquiry as to how the EPE members were victimized by the Monetary Board/CB top ranking officials before EPE members are again victimized through the DDO as proposed by the CB Governor to the Parliament.

• Ample documentary evidence is available that the present CB Governor is the most top ranking officer who has been involved in abuses in debt management and monetary policy. Therefore, the proposed inquiry is urgent because Parliamentarians were not aware of these facts and ground realities at the time of approving the DDO resolution yesterday.

• Any steps taken to implement the proposed DDO without an inquiry as proposed will be unfair and discriminatory under the Constitution as the cause of the unsustainable Treasury bond debt stock is not the EPF or the superannuation sector.

• Further, the employment of same officials who mismanaged and abused debt and caused debt unsustainability without any clearance from an independent inquiry is a major issue in the government’s policy governance.

• The crisis resolution is possible only if the crisis is investigated and ground level lapses and errors are accepted without the greed for remaining in the power.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books and a large number of articles published. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)

Source: Economy Forward