Sri Lanka: Showdown at the central bank

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%

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.”

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”.

Rajapaksa had appointed her brother in 2006 and he quickly became one of the president’s closest advisors and aides. Though frequently insisting he was independent, Cabraal was the first of Rajapaksa’s appointees to go, resigning within minutes of the unexpected election result, and more than two years before his appointed term ended.

Mahendran is also from a political family. His father was a mainstay of Sri Lanka’s ruling United Nation Party and a former ambassador to the UN. Arjuna spent much of the Rajapaksa era in Singapore, where he was managing director of HSBC’s private banking operation. 

The Sri Lankan business elite likes to keep its cash offshore, and Singapore has long been a favoured bolt hole. Indeed, this correspondent first met Mahendran in Singapore in the mid-2000s, where he had set up a meeting with the then opposition leader, now prime minster, Ranil Wickremesinghe, who was bidding for power.

Mahendran’s CBSL governorship was a homecoming for him. After reading PPE at Balliol College, Oxford, he joined the CBSL in 1983 as an economist, leaving in 1993 for a commercial banking career, punctuated by a stint as chairman of Sri Lanka’s influential Board of Investment from 2001-2004, during the second of Wickremesinghe’s three terms as PM.

Meanwhile, Cabraal and Mahendran continue to brawl, launching suit after countersuit in the courts against each other, while also conducting a public slanging match across Sri Lanka’s delighted media. Lurking in the not-too-distant background, as ever on this racially-riven island, is that Mahendran is the first Tamil to be CBSL governor in a Sinhalese-dominated ruling class. 

Ex-governor Cabraal was unavailable for comment, but Mahendran told Euromoney that he was “proud” to be “the first Tamil to be CBSL” governor and was continuing to do his job “effectively and transparently, despite the background noise.” He condemned Cabraal for “politicising a proud and independent institution” and claimed that Sri Lankans had had enough of Cabraal “slugging it out”. 

Investigations

August’s parliamentary elections would suggest as such, when voters put an end to another bid by Rajapaksa to take power. The ex-CBSL governor has quietened his attacks since then but Mahendran still faces probes from the state anti-corruption body. A government investigation into Cabraal’s tenure at the CBSL is also on the way, Colombo sources claim.

Aloysius now also faces an inquiry, from the CBSL no less. Yet another separate inquiry had found that during Perpetual Treasuries’ attempt to corner the February 27 treasury auction, it had bet almost 15 times its own capital, breaching CBSL capital adequacy rules. 

Governor Mahendran told Euromoney he would recuse himself from that investigation and intended to stay in his job.