Tarzie Vittachi’s ‘Island in the Sun’ is perhaps the best piece of political satire written in this country. It has graphic desctiptions of the politicians of the nineties, with Sir John Kotelawala for instance being the Rogue Elephant and Dudley Senanayake the Tired Tortoise. J R Jayewardene was the Seethala Kotiya, a description that perhaps would not fit his nephew, familiarly known as ‘Poos’ in the family, a milder member of the Cat family.
But there is another description that fits Ranil well too, given the strange goings on at the Central Bank. Tarzie suggested that R G Senanayake could not move straight even when that was the easiest thing to do. So now we find that, what might have been an understandable – if capital friendly – change of policy was not done direct as a principled man like Eran Wickremaratne might have done. Rather there was clandestine activity which, in a Watergate style operation, has been concealed so that the ugly truth emerges only gradually.
I refer to the fact that the Governor decided on his own to introduce a policy of raising money through bonds only by auction. Or rather, it was not entirely on his own, because he revealed that the Prime Minister had been pressing him to do this. The Prime Minister had apparently told him that the dealers were complaining, but he had not found out who complained and on what grounds. Rather he said that he had checked himself, and said there were complaints, but even he granted that dealers had not complained they were shut out of the Direct Placement policy the Central Bank had been practicing before he took over.
Eran said that his information was different, but in fact all those dealers who gave evidence had no complaints about being unfairly deprived. Their desire to have an auctions only policy seems to have been based on what Dr Wijewardena, the universally respected former Deputy Governor, described as the natural desire of such dealers to make maximum profits. His view was that it was the duty of government to discipline the market, through also having Direct Placements, since that would help to control the interest rate, which he seemed to see as an important function of the Central Bank.
Eran’s keenness to have an auctions only policy was never hidden, and he based this on the fact that, through Direct Placements to what are described as captive sources (the EPF and other government institutions), they got less interest than they might have obtained on the open market. I can understand such an argument, though I would naturally favour a policy of selective intervention since all except the most diehard capitalists believe government intervention is essential to ensure a really fair playing field – hence interventions such as free education and free healthcare and subsidies to promote employment in deprived areas and so on.
What is appalling in this instance is that the Governor did not enunciate such a policy and get Monetary Board approval for it. When the Bank moved to more Direct Placements in 2008, there were Board papers that were ratified. This time round the Governor admitted that no paper had been put, and there was absolutely no evidence that the Board had decided to stop Direct placements. In fact there was evidence to the contrary, because at its following meeting the Governor reported that the ‘Bank’ had decided to temporarily suspend Direct placements. The Board simply records that he told them this, there is no trace of ratification.
Meanwhile the Governor was pretending that the Board had made such a decision earlier. When he went down to the Auction floor, not once but twice, on the fateful day, he instructed the Public Debt Department to take 10 billion by auction. He gave different reasons for this, the first being that they would not be able to raise the required money through Direct placement, an argument they rejected. It was then that he told them that Direct placements were no longer allowed, and in admitting that he had done this, he claimed that he was conveying a decision of the Monetary Board. As mentioned, there was no such decision, and instead he told the Board the next week that it was a ‘Bank’ decision – rather like Louis the 14th who said that he was the State, Arjuna Mahendran evidently believed that he was the Bank.
Again, there is nothing against a Governor taking a sudden decision if he believes this is in the best interests of the country. But this should be done transparently, and if possible after due consultation, and it should be certainly reported formally with explanations, with opportunities for discussion and alteration if appropriate. This is especially necessary when such a grave decision is taken, inasmuch as before February 27th bids were generally at a premium (which means government pays less interest) whereas after that they were at discount, which means government has to pay more interest.
The government groupies on COPE – not Eran – made much of the fact that the Governor claimed he had not given instructions, but only said ‘If I were you, I would do this’. There is no doubt he said that, but evidence was given to the effect that he had said they should do this, and it was also noted that in Sri Lanka his views carry great weight. And surely, while I do not believe that as a Singapore citizen he was precluded from being made Governor, he should surely have realized that in Singapore too, had Lee Kuan Yew said, ‘If I were you’, his suggestion would surely have been implemented. And in any case the groupies should have realized that, if staff believed they were being instructed, that is what is relevant, not the semantics of the way in which they were made to change their original recommendation.
Again the groupies made much of the fact that the Public Debt Department manual said that the auction system should be used as much as possible. But the Deputy Governor in charge made it clear that the manual is not a legal document, and had not been ratified by the Board or even the Bank. Given that the Board is the ultimate authority, it is obvious that decisions based on Board papers must supercede guidelines – and since the guidelines also envisage Direct placesments, it must be the responsibility of those engaged in day to day operations, subject to the control of the Board, to decide on proportions. With a clear instruction that interest rates should not be raised, it is also deeply worrying that the Governor should have on his own made decisions that led to interest rates being raised.
I would still believe that the arguments Eran made need attention. But to reform the system suddenly, with twisting arguments and without proper consultation, is to give even necessary fiscal reforms a bad name. I go back to the need for consultation which the President’s manifesto incorporates, but which has been ignored throughout in the last five months and more.