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Certain macro factors need to be managed carefully -Cabraal

22 Oct 2019 - {{hitsCtrl.values.hits}}      

Former Central Bank Governor Ajith Nivard Cabraal responded to a few questions posed to him by viewers during a live interview conducted on Facebook. Here, he spoke about the growth of the economy during his tenure, where it has gone wrong, allegations on bond issues and the future of certain political factions.
Excerpts : 

Live interview on DM online​

Q The economy grew from USD 24 billion to USD 79 billion during your period as the Governor. What would you say was the main reason for this?

We were prepared for the challenge of taking the economy forward. We didn’t come during early 2006 and say we must find what to do. We were ready with the plans and focused areas we were going to work on and started on each of those areas together. Sometimes we cannot wade through one to the other, but have to do several things together. That was our key thrust. Then we started on the development, dealing with the war and that helped us to give confidence to the rest of the country and stakeholders and their were results. Each year there was an incremental way in which it was going forward and it gave more confidence to people. 

Q  Recently you presented a 12-point revival plan and said that the rupee should be 150 per USD. Don’t you think that’s a little too ambitious?

What happened was at the beginning of 2018 the rupee was at 150 and then just a year later it was 183. If the rupee could have depreciated in one year why can’t the opposite happen? Why are we thinking that we cannot do it? I’m sure we can with the right conditions put in place. I think what we need is to have confidence restored back into the economy. Once that happens and investments come back and other macro-fundamentals start moving in the right direction. 

Q Hoteliers have been agitated for years. Municipality and Local Government licence fees based on up to 1% tax on turnover based on the hotel industry. They feel this is an unfair tax where they are singled out in comparison to other sectors such as banking, insurance etc where they only take Rs. 5000. What are your comments?

Many industries have told us that they have been taxed unfairly. These include the banking sector, hotels, small and medium enterprise sector, professionals and various traders who have been taxed unfairly. I think hoteliers have a very good reason to be agitated because they have been made to pay many taxes. I believe we need to rationalise all these quickly. That’s why the first part of the plan that I have presented suggests that we should cut taxes at least by 20%. Some of these obnoxious taxes such as those on apartment sales and remittances need to be scrapped because they are inhibiting growth. Tourism is a sector that we want to support, which will touch people and filter down fast. It’s much better to forego some taxes and ensure that the people have jobs and their energy to do additional activities and that’s the philosophy that will drive the economic policy in future.  If they are energized they will take Sri Lanka to a five million tourism product. Even a three-wheel taxi driver will have more hires. 

Q Could you clarify the fraudulent bond issues during your time? Greek bonds, hedging, humping and dumping using EPF money to buy shares of nearly bankrupt companies etc.?

When I left Central Bank, the portfolio of the Employers Provident Fund (EPF) had had an unrealised gain of Rs. 20 billion. That wouldn’t have been the case had there been pumping and dumping. The Greek bond case was a situation where it was challenged in the Supreme Court by Sujeewa Senasinghe, who wrote a book on the alleged Bond Scam. Details of the case is in the website of the Supreme Court. They specifically say ‘considering the totality of the circumstances, it is neither possible nor desirable to hold that the members of the monetary board in taking a  decision to invest in Greek bonds have acted arbitrarily, unreasonably and in a fraudulent manner. In view of the conclusion reached, the Court is not inclined to express any opinion on the objections raised’. 

I recommend all these people who ask this question regularly to go read it through. If anybody has any doubts, please refer to this case.  Hedging is not a fraudulent activity. It is an activity that people use in order to deal with some risk. It’s like an insurance and was proposed by the Central Bank. But something went wrong with that as a result of certain factors. But no one alleged. That was not done by the Central Bank, but the Petroleum Corporation. It was only an idea that was generated by the Central Bank’s economic research team. It was never alleged that there was anything fraudulent in that. There was a loss that occurred, but that was certainly less than what this Government paid as compensation for the Port City stoppage of work as well as the cancellation of the SriLankan Airbus. Coming back to the Greek bonds, although they say that there was a loss of USD 6.6 million what they said is that during the particular year, the Central Bank made its highest ever profit which was USD 430 million against a USD 50 million profit made last year and a USD 100 million the previous year. You can see that despite taking this loss into consideration, the Central Bank made its highest ever profit and it was a landmark year; although this loss was suffered. 



Sometimes we need to hold the hand of certain state institutions to ensure that those also grow. I think we must do what is right for the country at the stage that it is in. Don’t embrace certain theories and principles, merely because they have been applied in other countries

Q What is your stance with regard to the perpetrators and masterminds behind the bond issue? Would we ever see those responsible being behind bars and their gains brought back to the Government? 

This alleged bond scam was twofold ; it happened in February 2015 and again in March 2016. You could see the number of people involved in it. 

The main way in which this alleged bond scam took place was that the system of issuing bonds didn’t allow any bonds to be issued in a fraudulent manner.

 That is why I told that anyone who was making allegations about my period of issuing to please go and ask anyone to do any check whatsoever. I’m not afraid and I don’t think anyone in Central Bank is afraid to face any inquiry. We know that it wasn’t possible to initiate any bond scam with that system in place. But on February 27, 2015 that system was changed arbitrarily on the insistence of PM Ranil Wickremesinghe. They changed the system which allowed this kind of thing to take place. If the system wasn’t changed, even Mahendran couldn’t have done that. Now we need to get to the bottom of that. During the past five years there have been one cover-up after another. I’m writing a book on the cover-ups because people should know the extent of them. Those people have to account for their actions and the loss that we have suffered, not only the direct loss we suffered on the day of the alleged scam. 
There were losses that were suffered for thirty years as a result of what is being issued at higher rates of interests. Because of bad publicity, the confidence in the economy was lost and interest rates have still not come down. The Average Weighted Prime Lending Rate (AWPLR) was only 6.2% at the time I left the Central Bank. Today it is nearly 12%. This means that every single person who is paying interest has to account for an additional 6% premium that has been added to all transactions. The Commission that was appointed didn’t do its job properly. 

Q  But your sister was on the Perpetual Board. Your comments?

That was again being said by many people. I’m glad that you asked this question. My sister was invited to the board of Perpetual Holdings and she was there for one year. She hadn’t attended a single meeting and she had never had any dealings with Perpetual Treasuries. People pretend as if they don’t know this. Even the Commission didn’t write about any involvement regarding her during that period. During the time I was Governor, Perpetual Treasuries had bid for about Rs. 2.7 billion worth of bonds at the auctions. They had only received Rs. 26 million. Billions bid but Rs. 26 million received. That was all they had got which was at normal rates. That was  what  all others had got. It was only after I left that the entire incident had taken place. My sister and I have never run away. They are all here. My sister has said that she would come and give evidence any time. I even told the first COPE Commission that I would come. I would have been one of the first people to have said to invite me to the COPE and I’ll gave evidence.Try to find the man after me and catch him and see if you can ask a single question. 

Q According to the President, the bond reports states that there was a loss of Rs. One trillion from 2008-2016. Between 2015 and 2016 the loss was Rs. 11 billion. Doesn’t the rest fall under you?

Our President Sirisena has been making all sorts of comments of that nature. We all know that. But nobody takes him seriously. These are just statements he has made. Whatever he says, let the records speak for themselves. It is not true. It complete nonsense. Even if it is the President who has said it, nonsense is nonsense. 

Q  State enterprises are a drain on taxpayers. Government-owned monopolies such as CEB and CPC have made huge losses which have required tax money to prop up these unproductive organisations. Every Government has promised to reform them, even when the previous regime had a 2/3rd majority in Parliament, they still failed. Economics show us that competition and private enterprise lead to cheaper and better services. The privatization of Sri Lanka Telecom and the opening of the telecom market are excellent examples of how privatisation and de-regulation help. Will you support opening up the electricity and petroleum markets to more competition besides CEB and CPC?

There is one area which may need a little clarification. You have mentioned that it’s cheaper, but it’s not so. Those days the prices you would have paid for telecom would have been much cheaper. Of course the service is terrible. 

That is what we need to accept as the difference. When you have a private entity they will charge the right price or a higher price to make a profit and ensure that the customer gets a proper deal. Take the Petroleum Corporation – tomorrow the CPC can increase the price and make a profit because it’s a monopoly. If it is handed over to the private sector, the first thing they would do is to bring in a price that would make money. But what does it do to the customer? Are we prepared to do that? If yes, that’s perfectly fine. At the time that the oil price went to USD 145 per barrel, we still gave petrol at a much lower rate. 

That loss was accepted by the Government. The Government subsidised that. During that period of time although it was a tough call, the Government took a political as well as economic decision that we want to ensure that the country’s economic activities don’t get stalled by this high price that it had to pay. So we took an economic and a political call and that was a deliberate action by the Government. 

It had nothing to do with the efficiency of the Petroleum Corporation. Even if the CPC becomes inefficient the bulk of its expenditure is  not on salaries or any other factor, but on the fuel price. 

If the fuel price is high the price will have to be high. Here what has happened is that there are certain times you have to offer support to the consumers in order to bring that economic activity up to a certain level of robustness. 

At the same time we need to ensure that these are companies which are not in any way a burden on the government taxpayer as well as the people of the country. So it’s a balance. Economics is always about a balance. Sometimes the most optimum solution is not found in that particular organization alone. It can be found elsewhere. 

The SriLankan Airlines is going to be restructured, but we should view tourism as a product. Who would support tourism during a downturn? We mustn’t get completely carried away by this privatisation thought and think that everything would be perfect with privatisation. Right now we are at USD 4000 per capita income and our economy isn’t robust enough to charge interests of that nature. Sometimes we need to hold the hand of certain state institutions to ensure that those also grow. I think we must do what is right for the country at the stage that it is in. Don’t embrace certain theories and principles, merely because they have been applied in other countries. So let’s give it some time and I would support the companies you just mentioned, to make them better managed companies. 

Q So you don’t support Sri Lankan consumers to have more choices as to whom they buy their power and energy from?

 I wouldn’t say that. But for everything there’s a timing. We need to ensure that people have it at the right time. If we were to bring in so many other oil companies to Sri Lanka I don’t think we would be doing justice to consumers. We may only have a steep increase in the pricing alone. There’s a lot more focus on electricity as well, but what has happened? During the past five years not a single unit has been added to the National Grid. So how do we tackle that? The Government is contemplating adding 500 MW of emergency power. The worse thing that you can do is have emergency power. The answer to that is not that you do a tender for emergency power, but have a longterm generation plan. This way you would ensure that each year there would be new amounts of units added to the national grid. Then we would be in a position to have better pricing and better relief to the consumers. In 2014 the electricity prices actually reduced after the 300 MW Norochcholai Power plant was commissioned. That was a promise that was given in the manifesto of President Mahinda Rajapaksa and it was followed because we were in a position to do that. 



Many industries have told us that they have been taxed unfairly. These include the banking sector, hotels, small and medium enterprise sector, professionals and various traders who have been taxed unfairly. I think hoteliers have a very good reason to be agitated because they have been made to pay many taxes

Q What is Sri Lanka’s way out of this issue with the fiscal deficits because state finances are in dire straits and brought down further by SOE burdens?

The SOE burdens are minimal compared to what can happen in the case of the total public sector management of the economy. Last year the Central Bank report showed that due to the depreciation of the currency, Sri Lanka’s debt burden grows by Rs. 1063 billion. The Colombo-Katunayake expressway cost us only Rs. 37 billion. We could have done about 35 such expressways through the amount the rupee depreciation added on to our debt. That is the critical part of public sector management. All debts put together of SriLankan Airlines etc., won’t come anywhere close to it. So we need to manage our economy properly. If we don’t manage it we get into serious trouble. So we need to get our interest rates, rupee and the SOEs right.  Why we are here in this situation, where people are wondering whether we could survive is because we have actually gotten into trouble in the mega areas of our economic management. We have done badly in terms of interest rates, rupee, fiscal deficit and foreign direct investments coming in and those need to be fixed very quickly. 

Q  Do you think the SLPP is a Democratic Party? Can any other candidate other than a member of the Rajapaksa family be party leader some day?

It is a young party. It has been in existence only for about three years and there’s lot more time for leadership changes. If you take the SLFP, it had the leadership of S.W.R.D Bandaranaike and then from him to Sirimavo and Chandrika, but then it changed. If you take the UNP from D.S Senanayake it went to Dudley Senanayake and then it changed. So there were times where you would have seen certain initial stages of the Party being dominated by a certain group or a certain family. But over a period of time as other leaders emerged and they come forward there will be changes taking place. So I’m confident that even here there would be a certain transition.  I think people accept the undisputed leadership of Mahinda Rajapaksa and there has been consensus that the person who should contest the Presidency is Gotabaya Rajapaksa. 

Transcribed by Kamanthi Wickramasinghe