Illustration: Pete Ellis
They don’t make them like Indrajit Coomaraswamy any more. The calm and self-effacing governor of the Central Bank of Sri Lanka spent most of his career behind the scenes, working diligently to give strength and structure to a fragile frontier market.
An economist by training, he spent more than 40 years bouncing around the upper echelons of Sri Lanka’s civil service, advising a finance minister here and a prime minister there, and enjoying 16 years with the central bank.
He occasionally veered into the private sector, with directorships at Hatton National Bank and conglomerate John Keells. But by 2016, Coomaraswamy’s working life seemed to be winding down.
Yes, his advice was still sought by ministers and chief executives. But he was 66 and counting, and happy, after a lifetime of civic duty, to hang up his suit and spend more time with family and friends.
Then all that changed. In July of that year, Sri Lanka’s president, Maithripala Sirisena, bowed to intense pressure and fired the then-central bank chief, Arjuna Mahendran.
A Singaporean national, Mahendran was never a popular choice: some saw him as a financial puppet of the ruling United National Party. But the governor’s fate was sealed with the discovery that more than two thirds of the securities issued in a SLRs10 billion ($65 million) bond auction in 2015 had been sold to a primary debt trader owned by his own son-in-law.
The scandal could not have come at a worse time and it nearly crippled a government that was already struggling to stay afloat. When Sri Lanka finally emerged from a long and bloody civil war in 2009, it borrowed heavily to pay for an ambitious infrastructure spree, putting enormous stress on state finances. It took a $1.5 billion IMF-led bailout, agreed in early 2016, to stave off insolvency.
For years, our biggest source of instability has been the budget. But we are on track this year to post our first primary surplus since 1953, and our first current account surplus since 1987- Indrajit Coomaraswamy
The presidential commission’s report published in January this year found Mahendran guilty of leaking sensitive information to Arjun Aloysius, his son-in-law, and of manipulating rates to allow him to profit directly from the auction in February 2015.
That sale had started out small, with the central bank announcing plans to raise SLRs1 billion from selling 30-year government notes with a 9.5% coupon. It then suddenly hiked the target to SLRs10 billion and the coupon to 12.5%.
Aloysius snapped up SLRs7 billion of the debt securities, pocketing $11 million, according to the report – money that the state is still trying to claw back.
The report also accuses Perpetual Treasuries, a primary debt trader owned by Aloysius, of profiting from the sale of treasuries by buying them cheap and then selling at a generous mark-up to the Employees Provident Fund, the largest social security programme in the country.
Aloysius was detained in Sri Lanka in February and has been refused bail, while the attorney general has asked Interpol to help track down and arrest Mahendran so that he can be brought back to Sri Lanka. The former central bank chief is believed to be in Singapore.
Mahendran, Aloysius and Perpetual have all denied any wrongdoing.
Ravi Karunanayake, a former finance minister and foreign minister in prime minister Ranil Wickremesinghe’s government, was also caught up in the scandal after it came out that the SLRs1.45 million monthly rent for his apartment was being paid by Aloysius. When questioned, Karunanayake said he did not know that Mahendran’s son-in-law had paid the rent.
The report recommends prosecuting him for scandal, graft and perjury.
The repercussions have been serious. Sri Lanka dropped 12 rungs to 95th place out of 176 countries in Transparency International’s Corruption Perceptions Index for 2016, placing it alongside El Salvador and nearby Maldives.
Global investors were understandably wary of doing business in a corrupt, low-growth jurisdiction, especially given the involvement of a central bank governor in such a scandal. It did little to allay fears that Sri Lanka, for all of its manifest attributes, was an economy on the way out rather than up.
With Mahendran gone and the government in turmoil, the country needed a new candidate to run the central bank, preferably one with an impeccable reputation. To the surprise of everyone – including Coomaraswamy himself – the president plumped for the dutiful and stoic servant.
When Asiamoney meets Coomaraswamy in his wood-panelled offices over a cup of tea on a brilliant, hot February morning, he still seems a little dumbfounded at his elevation to one of the top jobs in the country. His dark eyes, peering out from beneath a thick mop of silver hair, crinkle in amusement as he remembers being told the role was his.
“I was completely retired,” he laughs. “And I don’t recall being asked to do the job, or saying yes. I heard about the appointment from a journalist who rang up to congratulate me. I had some reticence, as there were a lot of challenges in the economy and the non-bank financial area. But by that point, I clearly didn’t have a lot of choice in the matter.”
Yet Coomaraswamy turned out to be a wise choice. Few can claim to have his institutional knowledge of the central bank: his ability to make sense of its rhythms and nuances, and to temper and channel its power. He began his career there, and while he dipped in and out of the grand old building on Janadhipathi Mawatha over the years, spending most of the 1980s on secondment to the finance ministry, he always returned. Any concerns that a career civil servant used to receiving orders would wilt when presented with the chance to lead were quickly dispelled.
The immediate task he faced was to instil belief and motivation in insiders wearied by years of sovereign financial mismanagement and internal scandal.
“Morale was the big problem,” he admits. “This is an iconic institution, long known for its professionalism and technical excellence. But over a period of about 10 years, a number of issues emerged where its credibility was questioned. All the vast majority of staff wanted was to be able to do their jobs in a professional way. It was my challenge to create an environment that let them do that.”
Coomaraswamy is wary about commenting publicly on his predecessor, noting that Mahendran was and remains a good friend. But his actions since assuming the governorship point to a deep-seated belief on his part that the bank was in need, not just of a new change of leader, but of a totally new way of thinking.
The old bond allocation system, deemed too opaque and open to exploitation, has been replaced by a three-stage hybrid structure. Primary dealers bid at auction for government debt securities, and if an issue is undersubscribed, the process moves onto steps two, with primary bond dealers and larger funds offered additional bonds at the same weighted average yield, and three, where the central bank can force dealers to buy any unsold bonds.
That final stage has yet to be enacted, in part due to doubts held by traders and, insiders say, the central bank itself, as to its legitimacy.
More transparency has also come in the form of an annual central bank auction calendar, released each November.
Do these steps – the new hybrid structure and the government bond auction calendar – mark an improvement that provides more transparency and makes the system less vulnerable to manipulation?
“For sure, these are both steps in the right direction,” says one investment banker working in Sri Lanka. “In an ideal world, the most transparent mechanism is the complete market-driven single-price auction system. But certainly, this is a step in the right direction.”
So far, the new approach seems to have worked. Sri Lanka raised $500 million from the sale of development bonds in January. More will come. Colombo aims to sell $5 billion-worth of debt securities this year, a mix of $3 billion of development bonds and $2 billion of sovereign bonds.
As of early March, a $2 billion sovereign print was “very much on the cards”, according to a leading debt banker. “The government is in the process of pre-bookbuilding for it. Proceeds will go towards settling maturing debt.”
This investment banker also says a renminbi-denominated panda bond, equivalent to $500 million, is being “considered and which may take place late in the first half of the year, subject to conditions”.
Our ambition is to be one of the leading economies in Asia. To get there, we will need to pass that test without moving away from our very disciplined financial road- Eran Wickramaratne
Coomaraswamy confirms that the central bank is considering the sale of debt priced in yen and renminbi on top of the dollar-denominated issues this year.
“We could go with either samurai bonds or panda bonds, or both,” he says. “Basically, we are agnostic – we will see where the market takes us, and go by cost.”
That additional money is sorely needed. Sirisena’s government faces record debt repayments of $12.7 billion in 2018, including $5.36 billion in interest and $2.9 billion in foreign loans, much of it owed to Chinese state lenders.
Another $5 billion in maturing foreign loans and interest is due in 2019. Coomaraswamy is also taking steps to tackle the country’s troubling debt-to-GDP ratio, which jumped from 68.7% in 2012 to 79.3% in 2016.
A new Liability Management Act, tabled in parliament in late February, aims to cut that ratio to 70% by 2020, by allowing the central bank to exceed borrowing requirements set out in the December budget, so long as it can prove capable of paying off new and existing debt.
“Existing rules forbid us from exceeding borrowing requirements, meaning we cannot build up buffer stocks to manage our future obligations,” the governor says. “The new laws have real teeth. So long as we can specify why we are breaching the budget limits, and how we are planning to get our finances back on track, it gives us the headroom we need, letting us do more switching and refinancing to extend the tenor of our external debt and bring down overall debt. It would be great if we can retire some of the expensive stuff.”
It sounds daunting, but 18 months on from his appointment there are signs of genuine progress. Tax revenues are growing as more people are brought into the system and after last year’s increase in value-added tax to 15% from 11%.
The Inland Revenue Act, scheduled for approval by parliament on April 1, will lift the top rate of income tax to 24% from 16%. Another new levy tipped to arrive in the second half of 2018 will impose a 0.2% tax on every financial transaction. It’s handy money for the state, though bankers aren’t happy: they put the likely annual cost to the sector at around SLRs150 billion.
Foreign reserves meanwhile continue to rise, hitting $8 billion at the end of 2017, against $5.5 billion a year ago. Exports hit an all-time high of $11.4 billion in 2017, up 10% year on year, according to the international trade ministry. Even foreign investment is slowly returning.
Chinese cash is helping to finance a vast new financial hub, Colombo International Financial City, which is taking shape on reclaimed land off the capital’s shoreline, while in December, state-run China Merchants Port paid $810 million for a 70% stake in Hambantota Port, a harbour and investment zone on the south coast.
That deal has spurred on India and Japan, with companies from both nations investing in Trincomalee, a deep-water port on the northeast coast. State-owned Indian Oil Corporation is in talks to fund a new, $350 million refinery adjacent to the port.
Western companies are also returning, albeit tentatively. In February, Germany’s Allianz bought Sri Lanka’s Janashakthi General Insurance for $107 million, marking the largest-ever foreign acquisition of a local firm.
That deal will “give a big boost to investor confidence,” says Deshan Pushparajah, managing director at investment bank Capital Alliance Partners, which advised the Sri Lankan insurer.
Rising investment may actually help the government balance its books for the first time in living memory.
“For years, our biggest source of instability has been the budget,” Coomaraswamy says. “But we are on track this year to post our first primary surplus since 1953, and our first current account surplus since 1987. So, these deeply entrenched structural imbalances seem to be getting addressed, and that’s a major advance.”
What strikes business travellers to Colombo is the respect, bordering on affection, that mention of the governor’s name inspires. Analysts and bank chief executives alike, even off duty, have nothing but praise for his ability to bring equilibrium to the central bank and sanity to the nation’s finances, without seeming to break a sweat.
He is “the man who returned integrity to the central bank and to the government,” the chief executive of a local lender tells Asiamoney. “He isn’t a rock star who loves the spotlight, as is the case with some central bankers, and he doesn’t have agendas. What he does is to make good decisions at the right time.”
Another banker says the governor “didn’t need to do this job, but he answered the call out of duty. He came in with a fresh approach and said and did all the right things in a tough political environment. Hats off to him – he saved this government from itself.”
For his part, Coomaraswamy gently scotches the notion of a knight riding to the aid of an imperilled nation.
“If that is what I really am, then we are in a lot of trouble,” he smiles.
But then, perhaps the central bank chief, for all of his innate humility and impeccable manners, knows it makes good sense to keep his feet firmly planted on the ground.
For the truth is that despite an upswell in business confidence – which is explained away by some as sheer relief that things are not a whole lot worse – Sri Lanka’s finances remain in a parlous state.
Take the basic matter of growth. By all rights this safe and open frontier market, blessed with a good education system, a benevolent climate and a handful of standout industries (tourism and apparel, among others), should be powering ahead. Yet it isn’t.
In India, the economic motor of south Asia, output grew 7.2% year on year in the final quarter of 2017. By contrast, Sri Lanka’s economy is on track to expand by between 5% and 5.5% in the year to the end of March 2018, Coomaraswamy reckons, up from 4.7% in 2017 and 4.4% in 2016.
He describes the current growth rate as muted and a far cry from his target of between 6% and 8% over a sustained period.
In its October 2017 World Economic Outlook, the IMF expects output to expand by 4.8% in the 12 months to the end of March 2018.
Deshal de Mel, economic adviser to the finance ministry, says the “problematic” economy was performing “well below potential”.
What holds Sri Lanka’s growth rate in check is a mix of shallow capital markets, the small pool of investible assets, a lack of interaction with the wider region, poor infrastructure and corruption.
There are mitigating factors too, to be sure. Last year, Sri Lanka endured the worst floods in a decade and the worst drought since the 1970s. That put a rocket under consumer prices, which rose 5.8% year on year in January, close to the central bank’s ceiling of 6%.
“We need to be careful that persistently high inflation does not feed into wage pressures,” Coomaraswamy frowns. “The monetary policy board is looking very carefully at that.”
Senior government figures are also perturbed by the struggle to attract foreign capital.
Inward investment hit $1.65 billion in 2017, a record high, thanks largely to Chinese cash flowing from the Hambantota Port deal and new or augmented free trade agreements signed with Singapore, Europe, India and China.
Yet Coomaraswamy wrinkles his brow at the mention of the FDI data.
“It is positive, and it is a sign that we are moving in the right direction,” he says, “but really it’s nothing to write home about when compared to peer countries in southeast Asia.”
The only viable solution to this quandary, experts say, is to break up the public sector. That won’t be easy. Privatization is a sensitive topic in a country where inequality is high, salaries are low, unions are strong and the state remains a big, if plodding, investor and employer.
But the sale of public assets is a priority for the Sirisena administration – and if all goes to plan, the policy for which it may be remembered.
In January, the ministry of public enterprise development said it would sell stakes in two highly visible assets: a 100% stake in a seafront property occupied by Grand Hyatt, and a 51% controlling stake in a building managed by Hilton.
Coomaraswamy says the sales should “reasonably expect to generate $500 million, all of which will go toward” debt reduction.
Tougher divestments lie ahead, including the partial or total sale of a dizzying array of state-run agencies and corporations, ranging from fishing and power production, to insurance and rubber production.
The real stars on the list are a trio of powerful and largely well-run state lenders: People’s Bank, Bank of Ceylon (BoC) and National Savings Bank.
Most of these sales are unlikely to be done this decade, and certainly not before the next round of presidential elections, scheduled for 2019.
Some are likely to be particularly painful, notably monopoly oil and gas operator Ceylon Petroleum and SriLankan Airlines. The flag carrier is in a bad way, saddled with debts of $580 million at the end of March 2017, according to company data, most of it owed to BoC and People’s Bank.
Convincing the millions
Yet the establishment is consistent in its message here. Speaking to Asiamoney in Colombo, state minister of finance Eran Wickramaratne says the government is “committed to liberalization”.
He adds: “Since independence 70 years ago, the economy performed best between 1977 and 1994, when we began to move away from our old archaic model, toward a modern economy that valued foreign investment, modernity, free trade zones and open markets where investors could put their money to work in agriculture, energy and infrastructure.”
Convincing this country of 21.4 million people to take part in the journey won’t be easy.
He points to the example of public lenders: “We have a choice. To continue the status quo, or to free the state banks to compete.” Choose the latter option, he says, and the large state banks “can become significant long-term financial sector players, and arrest the decline of their market share”.
Insiders also point to the need for the island’s powerful conglomerates to sell off assets and divisions to add depth to the shallow capital markets.
“We need more IPOs, more interest from foreign funds, and approvals for real estate investment trusts,” says a leading fund manager.
Colombo Stock Exchange is planning a non-deal roadshow in April that will take in London, New York, Singapore and Hong Kong, portraying the island as vibrant and open for business.
But truth be told, Sri Lanka remains an afterthought even for the specialist investors, as indicated by the MSCI’s Sri Lanka Index, which rose 2.9% in 2017, even while the firm’s Frontier Markets index gained 32%.
Other dangers lie ahead. Sri Lanka will continue to walk a very fine financial line – it has no other choice. Government debt remains perilously high, while growth rates and inward investment are too low, to guarantee its future.
General elections in 2019 will present the government with a chance to show that it’s serious about keeping its books in order. Polls are typically followed by generous handouts: the last presidential ballot in 2015 resulted in a SLRs10,000 payment to each of the country’s 1.3 million state employees, adding SLRs13 billion to the budget.
“In the next pre-election period, the manner in which we handle social transfers and expenditures is paramount,” says state finance minister Wickramaratne. “Our ambition is to be one of the leading economies in Asia. To get there, we will need to pass that test without moving away from our very disciplined financial road.”
Coomaraswamy, who is fond of describing Sri Lanka as a messy democracy where order and chaos are bedfellows, adds: “The upcoming elections will definitely be a challenge. Can we maintain our discipline? In two years’ time, we will start to see tangible benefits from our current macroeconomic policies. If people can see the real benefits of sound fiscal management, they may be more willing to continue with it.”
Our meeting comes to an end, and Coomaraswamy, ever the gentleman, politely extricates himself from the room and heads off for another appointment.
Later, Asiamoney meets a banking friend, who casually mentions the governor’s heritage. A Sri Lankan Tamil from a family of overachievers, Coomaraswamy was educated in the UK at Harrow and Cambridge, before returning to Sri Lanka in 1973.
One wonders: would the now-governor have been as warmly welcomed into the bosom of the central bank a decade later in 1983, at the outset of bloody hostilities between the state and the independence-seeking Tamil Tigers, which lasted until 2009?
“No chance,” the banker replies. “He wouldn’t have been hired, and it would have been the last we saw of him. He’d probably be head of the IMF or the United Nations by now. So when the government came calling, after being plundered by Mahendran and company, the name Indrajit Coomaraswamy wouldn’t have been anywhere on the list. God help us all.”