Sri Lanka: Showdown at the central bank

By:
Eric Ellis
Published on:

Current and former governors trade blows; Mahendran and Cabraal at loggerheads.

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Arjuna Mahendran, the current governor of 
Central Bank of Sri Lanka

Vendettas waged by government bureaucrats never look good but, in Sri Lanka, such higher-minded considerations seem to have evaded two powerful men who should know better.

Arjuna Mahendran and Ajith Cabraal, the current and former governors of the Central Bank of Sri Lanka, have been at each other’s throats over all-too-common allegations on the Indian Ocean island – corruption and insider dealing.

The unseemly spat centres on what should have been an unremarkable occasion, a Sri Lankan 30-year treasury bill auction from the CBSL on February 27 this year. 

Outwardly, the auction was just another of a handful of similar events the bank performs routinely several times every month. At this auction, the CBSL sought SLR1 billion ($7 million) for a 30-year bill, received bids for 20 times that amount and accepted 10 times.

So far, so commonplace.

Coming just a few weeks after Mahendran had taken over from Cabraal at the central bank, the buoyant reception for sovereign paper should have shown how investors regarded the new man-in-charge, and the new government that had appointed him.

Only weeks earlier, Sri Lankan voters had ended the 10 year autocratic rule of president Mahinda Rajapaksa, whose government had been plagued by persistent allegations of corruption, particularly around the lucrative rebuilding deals that followed Colombo’s 2009 defeat of the Tamil Tigers after a brutal 25-year civil war that crippled development. With four of his brothers and myriad relatives crowding senior ministerial and government ranks, the Rajapaksa regime had become akin to a family business, its detractors liked to say.

Playboy

A month after January’s shock presidential election result, and with Mahendran installed at the central bank, the CBSL held what should have been a perfunctory treasury bill auction. Standing in the market was a Colombo dealer, Perpetual Treasuries, which ended up taking up 50% of the auctioned bills, after having bid for 75%

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Ajith Cabraal, the former governor of 
Central Bank of Sri Lanka

Perpetual Treasuries is a subsidiary of the local finance house Perpetual Capital, which is 50% owned by Mahendran’s son-in-law Arjun Aloysius. Aloysius is high-profile socialite in Sri Lanka, where he was known as the "Colombo Playboy" before his flashy 2012 wedding to Mahendran’s daughter, Anjali, an analyst with Credit Suisse, one of her father’s former employers.

(The wedding, a highlight of Colombo’s 2012 social season, was described by one attendee as "partly tacky, partly elegant", with debonair Indian tennis legend-cum-TV host Vijay Armitraj a prominent guest. The bride, it was noted, wore a $10,000 Vera Wang wedding dress.)

The February CBSL bill auction raised a storm in Sri Lanka’s febrile political scene, coming so soon after the Rajapaksa clan’s surprise exit and as the new government began investigating their decade of questionable deals.

CBSL governor Mahendran insisted he had done nothing wrong and, barely a month into the job, stepped down pending an investigation into the scandal, a probe that had exonerated him by April.

But this was not enough for ex-governor Cabraal, who claimed the probe was not independent, while citing the "irreparable damage to Sri Lanka" of this "terrible scam."

While you are frantically attempting to construct material to falsely implicate me for some wrongdoing or another during my over 3,100 days in office as Governor, a large quantum of wrongful acts committed by you during the short period you have served as Governor is also surfacing
Ajith Cabraal,  CBSL

In an open letter to Mahendran, Cabraal wrote: "Let me further inform you that while you are frantically attempting to construct material to falsely implicate me for some wrongdoing or another during my over 3,100 days in office as Governor, a large quantum of wrongful acts committed by you during the short period you have served as Governor is also surfacing."

Relations

Then came another wrinkle when it emerged that Cabraal’s sister, Shiromi, had also been a director of Perpetual Treasuries while her brother was governor. She resigned from Perpetual just two weeks after the contested February 27 CBSL trades by her firm. A government inquiry suggested that she too had been involved in "related party transactions".