Bond Scam II:
Way to get out of the muddle


Continued from yesterday

By Dr. Janaka Ratnasiri

One cannot blame the primary dealer for doing this because the government it self paved the way for such corrupt practices when it commenced the treasury bond scheme in 1997, which I understand was done on the advice of visitingofficials of an international financial institution. If the treasury wanted cash, couldn’t it have requested state banks or other financial institutions to advance the required amounts without having to go through brokers? Only issue is that no officials could siphon out money through these direct transactions unlike from transactions through brokers. So, it was the government with the blessings of the Cabinet of Ministers and the CB Monitory Board that allowed outsiders as well as insiders to financially benefit unethically while generating loans.

Alternatives to Treasury Bonds

The irregularities in treasury bond transactions came to light only because one primary dealer tried to kill the bird laying golden eggs. With the contacts he had with the CB Governor he apparently amassed huge profits overnight and then the matter was questioned. He could have done business as usual siphoning only small amounts from the system and no one would have noticed any irregularity. Finance Ministers could happily continue to present deficit budgets knowing the government could fall back on treasury bonds if the actual expenditure exceeds the anticipated revenue without making a concerted effort to enhance the government revenue.

The question one has to pose now is whether the government should continue with this system or whether it should be disbanded altogether. As revealed in the Bond Commission Report, the system paved the way for not only the primary dealers but also the officials in public institutions involved in the transactions to get richer.According to media reports, the government is planning to bring new laws to prevent such irregularities taking place in bond transactions in the future. What the government should do is to get rid of private companies acting as primary dealers altogether and limit its borrowings direct from the state banks and other state financial institutions, as there is no rationale to have a few private entities to serve as brokers. However, a better option is to do away with the bond system altogether by enhancing the government revenue.

Enhancing the government


The government should adopt a policy of austerity which will enable the government to balance the budget without having to raise loans. At the same time, a concerted effort should be made to enhance the government revenue. This could be done in many ways, some of which were elaborated in an article titled "The national economy – Way forward for sustainability" published by the writer in the Island of 10th, 11th, 14th and 28th of August 2015. These articles are accessible on:

In these articles he has described how the output of four sub-sectors, viz. electronics, tea, fisheries and energy could be enhanced significantly so as to earn more export revenue enabling bridging the existing gap between import outflow and export inflow. Concurrently, government could enhance its revenue through export levies.

In another article under the heading "Income tax collection – Need to widen the net" the writer published in the Island on 31 August 2015, (, he explained how a reasonable levy of personal income tax and corporate income tax along with an efficient system of collecting the tax could bring in an additional revenue of LKR 100 Billion from the former and LKR 1,000 Billion from the latter. But what the government has done is to reduce the income tax rates further. Perhaps an update of these estimates is appropriate which the writer may undertake shortly.

2018 Budget proposals

According to the Budget for 2018 presented last November, government expects to increase the revenue up to BLKR 2,326 mainly through enhancement of taxes on goods and services (G&S). Unlike income tax which will affect only those with high income, G&S tax will affect everyone irrespective of income level but it is easier to collect. The CB statement quoted earlier says "tax evasion and weaknesses in tax administration" are some of the causes for poor revenue. After 70 years of independence, cannot the government take measures to strengthen the tax administration and apprehend businessmen evading tax? Reading between lines, what the CB is trying to say is the prevailing corruption among tax collectors is one of the causes for poor tax collection.

The anticipated expenditure is BLKR 3,001, leaving a deficit of BLKR 675, which the government plans to recover from foreign loans amounting to BLKR 300 (net) and domestic loans amounting to BLKR 375. Out of this, BLKR 195 is to be sourced from non-banking borrowings meaning treasury bonds and BLKR 120 from banks and the balance from foreign investments.

Way out of the muddle

From the foregoing it becomes apparent that the government in office in the late nineties, in permitting a set of private money brokers to provide loans to the government, instead of depending on direct borrowings from government institutions including state banks, paved the way for corruption at the highest level.I believe it was a planned strategy enabling a few officials to siphon out public funds in a legitimate manner not questioned by auditors or bribery investigators. I believe even the politicians and policy makers in the government turned a blind eye to this system because of the huge benefits it provided to many. Hence, the practice of raising loans through private brokers should cease forthwith.

President Sirisena stressed the need to wipe out corruption in the country in the speech he made at the Independence Day Celebrations. He has also said earlier that he intended to bring new laws to prosecute those who did wrong in dealing with treasury bond transactions. However, what he should give priority is to do away with the set of primary dealers system altogether and restrict the loan transaction to public institutions only.

The next step he should give priority is to enhance the government revenue following the suggestions made by the writer in his articles referred to above so that there will be no need to raise loans from private money brokers.This advice was freely available to the government and may be the reason for not taking note of.Trust at least now the President will intervene in this matter and provide the necessary political will to implement these strategies. Perhaps the National Economic Commission chaired by the President could include this issue in its agenda.


The second sentence in the second paragraph of the Section "Meeting the shortfall" in Part I of the article should read as "With the gross debt in 2016 standing at LKR 9,400 Billion, by 2018, the gross debt would have exceeded a staggering sum of ten trillion.


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