CB Governor scoffs at baseless allegations

Shirajiv Sirimane

Sri Lanka has seen a healthy appetite of foreign investments through several sources and the Board of Investment’s estimate of attracting $ 1.8 billion this year is a reality.

Governor of Central Bank, Ajith Nivard Cabraal

Governor of Central Bank, Ajith Nivard Cabraal, in an interview to the ‘Daily News Business,’ said that these sources include Government securities, Stock Market investments, FDIs, Bank’s Tier 1 & Tier 2 investments, capital investments in varied corporates, and by Sri Lankan expatriates’ investments.

“The rapid expansion of the economy, is affording a large number of new and wider opportunities for investors from each of the above sources and as a result, the country has witnessed some substantial foreign exchange inflows this year and last year.

That is why over the past 6 or 7 months, we have also seen a gradual appreciation of the Sri Lankan Rupee against the US$ by nearly 6%,” he added.

Over the past couple of years, Sri Lanka has been internationally recognized as a “break-out nation” and many foreign investors have been positively looking at Sri Lanka. In fact, last week, at an investor conference that I attended in Singapore which was organized by a leading global investment bank, there was only standing room for people who wanted to come for the Sri Lankan sessions.

“This type of investor interest in Sri Lanka is now quite common and we are encouraged by this response. Based on these positive reactions, the BOI has estimated that Sri Lanka could generate around US$ 1.8 billion this year and from all accounts, it seems to be a realizable target,” he added.

Following are excerpts of the interview:

Q: Recently an MP had stated that the Treasury Secretary and you should be sacked because of the investment that the EPF had made in The Finance Company. What would you have to say to that?

A: This comment is obviously generated as a result of the hatred and malice that this MP has against me, Dr. Jayasundera and the Government. He knows very well that Dr Jayasundera and I are taking every effort to keep the economy of this country moving forward and as an Opposition MP, he is naturally upset about it.

He would probably have been happier, if inflation was rising, reserves were falling and the growth was negative, because that would have helped him and his party to gain some ground.

Now, he and his party are in a fix, because the economy is on a fast growth mode and development activities are visible all over the country. His “hate” comments are also obviously a part of the stepped-up campaign of misinformation and vituperative personal attacks against high officials of the Treasury and the Central Bank, which are clearly designed to destabilize and disturb the smooth functioning of the Sri Lankan economy.

Persons who initiate these types of attacks, are mainly political elements and they have carried out such attacks in the past as well.

The EPF has always maintained that it is making its investments with a long term focus and that all its investments, including the investment that it had made in The Finance Company, will bear fruit in the medium to long term.

Many other investments that the EPF has made at times when it appeared as if the particular company was not doing too well, has had dramatic upswings when conditions changed.

A classic example is the Seylan Bank, in which the EPF made an investment at the time when it was just being restructured.

Today, the Seylan Bank has progressed rapidly and the share price has improved dramatically, although no one talks about the success of that investment.

The same situation will occur sometimes in the future in the case of the investment in The Finance Company as well and at that time, the MP concerned will have to eat his own words in much the same way that many other MPs before him had to eat their words.

Q: Another allegation that had been levelled, is that there are large losses that have been suffered as a result of EPF investments in the stock market. Can you comment on that?

A: With regard to the investments made by the EPF in the stock market, the EPF has, on many occasions, explained that its policy of investment is based on the long term time frame and that a large portion of its investments are not a part of a short term trading portfolio and hence, not affected by short term fluctuations of market prices.

The Central Bank has pointed out that those who are now criticizing the EPF’s equity portfolio, are doing so, mainly by taking advantage of the current dip in the stock market and basing their claims on an unrealized diminution in value of the portfolio, which is entirely temporary and due to the market decline.

The Central Bank has also pointed out that at the stock market’s peak, the unrealized profits within the portfolio was over Rs.19 billion, which amply demonstrates that the equity portfolio of the EPF contains substantial value. However, for obvious reasons, these detractors have conveniently ignored such facts and pretend not to know about it.

Therefore, it is clear that the political elements are attempting to take advantage of the current stock market dip to bring disrepute to the Central Bank and to tarnish the image of its high officials.

Q: There were also some recent reports that the Central Bank is being guided by credit ratings of a new credit rating company and that may cause some destability within the financial industry. Your response?

A: Such a claim is absolutely incorrect and mischievous. Credit ratings are opinions expressed by credit rating companies and as is well known, these could differ from agency to agency.

However, the Central Bank’s supervision and regulations are based on standards, practices and norms established by the Central Bank and therefore, the ratings do not affect the depth and extent of the Central Bank’s supervision, or its assessment of the financial structures and progress of Non-Banking Finance institutions.

Hence, by claiming that the Central Bank is likely to reduce the extent of its supervision as a result of relaxed ratings issued by a credit rating agency, it is obviously an attempt to mislead the public.

Q: It is said that there is a large amount of investments in the Sri Lankan bond market that had been made by US investors and there is a possibility that those may be withdrawn if the US passes a resolution against Sri Lanka at the UNHRC session. What is your view on this matter?

A: These recent claims have attempted to suggest that there is a possibility that US investors may pull out their Sri Lankan Treasury bills and Treasury bonds investments and that as a result, the country could face a serious debt crisis.

Here too, the fact is that Sri Lanka has opened out only 12% of its Treasury bills and bonds portfolio to foreign investors and of that sum too, only about 50% has been taken up by US investors, resulting in the total exposure of Treasury Bills and Bonds to US investors being around 6% of the total Treasury Bills/Bond debt.

Further, contrary to the claim, there is a healthy appetite amongst US investors to further subscribe to Sri Lankan bills and bonds, while investors of other nationalities too, have shown a keen interest to invest in Sri Lankan bonds.

Accordingly, there is a continuous ownership diversification taking place, which ensures that the risk as highlighted by these elements had been substantially mitigated. In any event, the Central Bank has built large spaces within the local economy which has provided a high degree of flexibility, in terms of absorption of Treasury bonds and availability of foreign exchange reserves. Both these factors further mitigate any risks. Hence, I would dismiss these wild claims that are obviously designed to evoke fear in the minds of economic stakeholders.

Q: An Opposition MP has said that the blame of the Golden Key crash should be on you, the Central Bank and the Government, because you and the Central Bank have not acted appropriately and swiftly in this regard. What is your response to this?

A: In this connection, I must state that the Golden Key case had been examined by the Supreme Court for almost four years now and at no stage of such trial has the Supreme Court stated that the Central Bank had not acted appropriately or swiftly. At the same time, contrary to what the Opposition MP had attempted to make out, in the years 2003 to 2008, the Central Bank published over 200 full-page advertisements setting out the names of institutions that were being regulated and supervised by the Central Bank. In fact, the format of those advertisements was also according to guidance given in a previous Supreme Court order. All such advertisements did not include the Golden Key Credit Card Company (GKCL) as an institution that was regulated and supervised by the Central Bank.

Therefore, it is clear that the widest possible publicity had been given that the GKCL was not an institution that was regulated or supervised by the Central Bank and also, that it was not a bank, a finance company, or a leasing company. In that context, any person who transacted business with the GKCL would have done so, knowing fully well that GKCL was not an institution that was regulated or supervised by the Central Bank. In that background, it is clear that the allegations levelled are without foundation and are baseless.

Q: A few months ago, certain politicians also criticized the foreign reserve management activities of the Central Bank in 2011, by highlighting the losses that had occurred through the Central Bank’s investment in Greek Government bonds. What is your reaction?

A:The Central Bank responded some time ago to that matter by pointing out that its foreign reserve management’s profit of US$ 430 million that year was the highest in the entire history and also that its profit percentage of 6.6 per cent profit of the 2011 was the highest for that year by any Central Bank in the world. The Central Bank also showed that its investments in Greek Bonds was a small fraction of 0.6 percent of its total portfolio, which type of diversification is often practiced in the operation of a diversified portfolio and that notwithstanding the loss, substantial gains have been generated in the entirety of its reserve management activities.

These facts show the high degree of professionalism and sound investment acumen of the Central Bank team. I am sad that, instead of congratulating the Central Bank team, some of these politicians are trying to find fault with individual investments and using a single loss in the portfolio to throw mud at us.

Q: Dr Harsha de Silva is reported to have said that inflation figures of Sri Lanka have been miscalculated. How would you respond to that?

A: As usual, Dr Harsha de Silva has miscalculated and got mixed up. In the computation of CCPI, the basket of commodities is not decided in an arbitrary manner, but is based on a professional and scientific survey that is undertaken by the Department of Census and Statistics (DCS). These surveys are conducted from time to time in order to assess the spending and consumption patterns of the consumers.

Every person with an elementary knowledge of economics is aware of that. In Sri Lanka, the processes and standards of surveys, data collection, analysis and dissemination carried out by the DCS are at a very high level and have been lauded by many global institutions as being reliable and accurate. We, at the Central Bank are also satisfied with the way that the DCS conducts its affairs. So, when a politician tries to damage the DCS’s credibility, we do not need to get upset, because we know that such attempts would only serve to destroy that person’s already eroding credibility.