Government Says Emergency Funds Needed Due To Mismanagement Of Former Regime

Ministry of Policy Planning and Economic Affairs said in a media statement that the emergency funds raised through Treasury bonds recently were needed mainly due to mismanagement and mal-practices of the former regime.

The Ministry of Policy Planning and Economic Affairs further stated that these steps were done in good faith with several objectives including establishing financial stability and ensuring a sound monetary policy.

At a meeting held on 26 February 2015 to ascertain the Government expenditure projections attended by the Minister of Finance, Minister of Highways, Investment Promotion and Higher Education, Secretary to the Treasury and the Governor of the Central Bank of Sri Lanka, it was decided that the Government needs additional funding of approx. Rs. 15 Billion on an urgent basis to fund the recommencement of Highways and road construction projects.

The previous regime had not settled money owing to contractors and had not paid for lands acquired for road projects. The outstanding amount to be paid for land acquisition alone is Rs. 44 Billion, the statement said.

To complete the balance road construction work the Government needed Rs. 12 Billion as counterpart funds.  Most of the loan agreements for these projects have already been signed. Although the Government will be renegotiating prices, it will continue with these projects. The Government's immediate needs for cash to make payments for the bills in hand and to complete incomplete projects were to be met through the Treasury bond issues in March 2015.

The latest bond issue was opened on Feb. 27, 2015. The amount offered was Rs. 1 Billion. Thirty six offers were received amounting to Rs. 20 billion in bids. This enabled the Governor of the Central Bank of Sri Lanka to accept Rs. 10 Billion in accordance with the above decision, the media statement declared.

The statement also said that around September 2014, when it became clear that the previous Government would hold Presidential Elections in early 2015, the then management of the Central Bank of Sri Lanka decided to reduce interest rates and yields on Sri Lanka Government bonds. As a consequence, the yield on the Sri Lanka Government bonds declined. The foreign exchange reserves of Sri Lanka have been falling sequentially since interest rates were lowered in September 2014.

The acceptance of Rs. 10 billion worth of bonds has also resulted in raising the interest rate on the 30 year bond to 11.5% which is where it stood in June 2014 before interest rates were reduced. Furthermore, the Central Bank of Sri Lanka has also scrapped the 3 day rule restriction that allowed Banks to park their funds in the Central Bank at the 6.5% base rate on 3 days a month and get 5% in all other days, a practice implemented in September 2014.

The Government also decided that as far as possible all bonds should be through public auction. Private placement at pre agreed rates only helped favoured investors, the media statement pointed out.

The statement further said that it was a well-known fact that during the last decade the intersection of finance and business was controlled by a few people with nexus to the Rajapaksa regime. They had access to vital information on transactions, which they used to earn undue profits. There were pre-arranged transactions with state owned institutions instead of public auctions open to stock brokers and large investors. Many stakeholders were adversely affected due to manipulations in the stock market. Two Chairpersons of the SEC lost their jobs trying to enforce the existing regulations.

The Government is inquiring into these prior malpractices and will also investigate the alleged malpractices which are taking place at the Public Debt Department during bond auctions and private placements, the Ministry of Policy Planning and Economic Affairs stated.

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