Monetary Policy Insiders - The loss to the government on T bill auction on 31 May 2023?

 

This article shows how the monetary policy uses insider delas to make losses to the government on public debt management. The default of public debt for rework of debt contracts (so-called debt restructuring) is ample evidence for mismanagement of public debt by the Central Bank as the debt manager and fiscal agent since 1950.

The monetary policy decision to cut policy rates by 2.5% in the afternoon 31 May 2023, the Treasury bill auction decided on same day afternoon along with a private issuance and the Treasury bill auction held on today (7 June) show how the Central Bank uses insider acts to cause losses to public funds.

Treasury bill auction held on 31 May 2023

The Central Bank raised Rs. 160 bn at weighted average yields rates around 23%-25% (see the Table below) and a private issuance of Rs. 40 bn at the auction weighted average yields of 25.65% and 25.29%, which are almost same yields on the previous week's auction held on 24 May 2023.

 

However, when the auction was in the process, most powerful four Tender Board members representing the monetary policy cluster and the Governor who signs off the Tender Board decision knew that the policy rates cut of 2.5% was before the Monetary Board in that evening as a routine. The settlement of bids took place on 2 June 2023, two days after the policy rates cut.

The proper procedure of the Tender Board requires it to consider present monetary policy requirements and developments when deciding on acceptance of bids from each auction because government securities yields are controlled to transmit the monetary policy to credit markets as the Central Bank prefers. In last few months, the monetary policy has been to guide a significant reduction in market interest rates through Treasury bill yields by reducing them from 32% to 25% even without a reduction in policy rates.

However, the Tender Board did not consider this fact of common sense and accepted bids at the current market rates or previous auction yields with policy rates before the cut. 

Therefore, the loss to the government from this auction was at least 2.5%, i.e., around Rs. 5 bn of additional interest cost. As a result, this was passed as the profit to bond dealers at auction and placements.

The next Treasury bill auction held on 7 June 2023

As usual, at the next auction Treasury bill yield rates fell by around 2%-3% at first round effect of policy rates cut (see the Table below).

As a result, bond dealers who bought Treasury bills at the previous auction made a quick capital gain through higher Treasury bill prices from the beginning of the week after the rate cut.

The policy violation by the Central Bank

As usual, the policy that the Central Bank should have adopted to avoid the loss to the government would have been as follows. This is not rocket science but the common sense on debt management.

• Accept cutoff bids resulting at least 2.5% reduction in the weighted average yield on accepted bids.

• Offer non-competitive private bids at that yield. Since there is no bidding risk, private bidders would subscribe at any rates around the market.

• If funds available at the auction at such lower yields were not sufficient, the balance funding should have been raised by a private issuance to the Central Bank as usual. It will not matter for money printing as the Central Bank holding of Treasury bills was around Rs. 2,628 bn on that date. Anyway, a new round of money printing is now necessary to keep monetary conditions relaxed with lower interest ratees as conveyed in the last monetary policy statement.

Similarly, when a policy rates hike is on the card, more bids are accepted for the benefit of the government before market rates rise ahead.

Advice to the government

The above policy violation of the Central Bank is clear evidence of the willful negligence on the public interest. 

• No wonder a government or a business or a household would default if debt is managed in this way.

• It is sad to see why the Treasury who is responsible for fiscal operations just waits blind whatever the Central Bank does in debt management pushing the government to bankruptcy.

• Nobody has any worries as it is the general public who will pay for all such losses.

• This is an issue of common sense to be used in the public policy governance and trust especially at this juncture of the debt and currency crisis confronted by the public.

• Similarly, it is necessary to examine the loss created through additional interest cost of nearly 15% during the past year consequent to the sugar high interest rates policy of the Central Bank followed without any macroeconomic rationale for a bankrupt economy. Now, the Central Bank has abruptly commenced cutting interest rates and relaxing monetary conditions in violation of monetary principles it has been following for such higher interest rates in contrast to almost all central banks continuing to hike rates in line with same monetary principles.

(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)