CB misappropriates Rs. 235 bn of profit - A daylight scandal on public property?

 

The Central Bank (CB) has released its Annual Report over the bankrupt economy in 2022. Unlike in the recent past, there was no photo shoot of presenting it to the Minister released to the media with a note of highlights. As such, the Monetary Board seems to have covered up its shame of driving the economy into bankruptcy while sleeping on the Monetary Law Act (MLA) by releasing the annual report covertly.

As usual, this annual report is also just a report over the economy in 2020. Therefore, it is not a report of the Monetary Board as required in the MLA on the condition of the CB and a review of the policies and measures adopted by the Monetary Board in the economic context in 2022.

This article only highlights how the Monetary Board has hidden the profit on money printing by not transferring the profit to the government as required in the MLA.

MLA Requirement on Profit Distribution

The Part IV of the MLA sets out the procedure for calculation and distribution of the CB's profit before the expiration of 60 days after the end of each financial year.

• According to the note 35 to financial statements of the CB for the year 2022, the CB's distributable profit is Rs. 235.0 bn.

• As per 39 (c) of the MLA, this profit should be either be applied in liquidation of obligations of the government to the CB or be paid and credited to the Consolidated Fund in consultation with the Minister.

• However, this total profit has been transferred to the CB's surplus (or capital) which is a gross violation of the section 39 sated above.

• Therefore, the Monetary Board has not only violated the MLA but also the provisions of the Public Property Act by misappropriating or converting to own use the funds belonging to the government (pubic property), especially at present bankrupt condition of the government caused by the policy default of the Monetary Board itself.

• According to the CB annual report 2021, the Monetary Board similarly has concealed Rs. 27.5 bn. of profit by not transferring to the Consolidated Fund.

• Further, CB's financial statements show a transfer of profit of Rs. 30.0 bn. to the Government in 2022. However, no accounting is seen how this was effected.

Therefore, it has been a habit of the Monetary Board to misappropriate public property or profit transferable to the Government. What an independence is given to the Monetary Board to rob the government.

CB's financial condition summary in 2022

CB's financial statements are prepared and presented in terms of International Financial Reporting Standards and audited by the Auditor General. Accordingly, selected financial highlights for the year 2022 are as follows.

• A historic loss of Rs. 374.2 bn, from the profit of Rs. 158.2 bn reported in 2021. The fair value loss of Rs. 737.4 bn on foreign currency assets is the major contributor. The increase in net interest income on local currency assets to Rs. 445.1 bn from Rs. 60.1 bn in 2021, mainly on government securities portfolio which was the only policy action of the CB, in response to extra tight monetary policy has contained the profit negativity to some extent. Meanwhile, CB's operating expense has doubled to Rs. 20 bn.

• Assets of Rs. 4,510.3 bn, increased from Rs. 3,046.3 bn reported in 2021. The increase in government securities portfolio from Rs. 1,377.8 bn to Rs. 2,499 bn is the major contributory factor.

• A total equity of Rs. 82.2 bn, declined from Rs. 463.6 bn reported in 2021. Other reserves fallen to negative Rs. 191.2 bn from Rs. 315.1 bn reported in 2021 is the contributor.

Concluding Remarks

Financial statements are reflective of the management efficiency of any institution, private or public. However, it is not a secret that mismanagement is hidden behind creative financial reporting techniques that are not easy to detect.

The profit calculation, distribution of profit and accounting entries of the CB's financial statements violate not only relevant legal provisions in Sri Lanka as highlighted above but also accounting principles.

The adoption of financial reporting standards that are not of any practical use for the CB is also a major problem. For example, the profit/loss on the CB's operations does not accrue to the owner.

Further, the management of a central bank, despite its money printing monopoly and world famous economists, at losses to the owner/government is a question of common sense as managers always hide behind the monetary policy to explain financial outcomes while the monetary policy itself has defaulted on public duties.

Therefore, it is pertinent to carry out an external investigation into financial outcomes of the CB before all go under the carpet of the new central bank waiting in the Parliament as part of the IMF programme approved by it.

Given the extent of statutory violations of the CB, no doubt that this also will go under the carpet as the government is least interested in the compliance and good governance of public institutions.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books and a large number of articles published. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)