Why should someone plot to obtain information pertaining to the Central Bank? That is because such information has economic value and could be used by those who get the advance information for their own profit
Attempt at obtaining confidential Monetary Board papers
Tuesday, 8 August 2017
According to media reports, an SMS, alleged to have been retrieved from the iPhone of Arjun Aloysius and presented to the currently sitting Presidential Commission to Investigate and Inquire into the Issuance of Treasury Bonds, had spoken of an attempt at obtaining, through a Parliamentarian, a paper submitted to the Monetary Board.
The reference to the ‘Monetary Board’ here is to the Monetary Board of the Central Bank of Sri Lanka, the corporate body entrusted by Parliament to decide on the monetary policy and matters relating to the stability of financial institutions. No evidence has so far surfaced whether the Board Paper in question has actually been obtained by the parties involved.
It may still be an attempt only, but it points to a lapse in the maintenance of the confidentiality of the affairs of the Monetary Board of the Central Bank. This is not something which civil society should treat lightly or play ignorance or apathy.
Throughout human history, information has had an economic value. Kings have been spending society’s resources to employ spies and gather information on their rivals as well as friends. Such advance information had helped them to exercise superiority over rivals and effectively manage friends. This is very much relevant today since it is an information-led era.
Accordingly, whoever who has information which others do not have is far ahead in business and holds competitive advantage over his rivals. Hence, information has a value and, therefore, a price too. Thus, everyone is willing to pay that price if he could get vital information that would help him to get elevated to a more advantageous position.
Armed with superior information, he could, without exerting much labour, corner the market and accrue an undue profit to himself. In the process, all others in the market are to become victims. In economics, these market cornering plots are known as ‘predatory actions’ in which one party would prey on all others in the market.
It is not a good sign for a smoothly functioning market. There are two ways to avoid it. One is that making information available to everyone without discrimination through a proper disclosure policy. The other is preventing some to acquire information through immoral means.
With its pricey information, Monetary Board is a target
In the case of public authorities which have sensitive information, both methods are adopted. The Monetary Board of the Central Bank is one such public authority.
In terms of section 45 of the Monetary Law Act or MLA under which the Monetary Board has been incorporated and the Central Bank has been established, the Central Bank officers are duty-bound to preserve and aid to preserve secrecy with respect to information which they come to know through their official duties.
Any violation of this prohibition will result in, according to MLA, their being found guilty of an offence that would incarcerate them for a prison sentence or a fine or both. All Central Bank officers are conscious of this legal requirement and punishments. Hence, any violation of the requirement could be seen only occasionally and, even then, by some anonymous whistle-blowers who feel that they should do so in greater public interest. It is hardly that a central bank officer would have done it for his personal profit.
Central Bank has taken every precaution to prevent information from leaking
This prohibition applies to papers submitted to the Monetary Board as well. To maintain secrecy of its affairs, the Board Secretariat takes a number of measures. The Board Secretariat is normally out of bound for other bank employees and only those who work therein are permitted access. They are sworn to a special oath of secrecy.
The number of copies produced of a Board Paper is limited only to the number that is needed for distribution. They are serially numbered according to the person who should get them. After the Board meeting or after the lapse of a reasonable time, the Board papers are returned to the Board Secretariat for destruction.
All those who have access to Board papers are strictly advised not to release them to outside parties. Hence, if the head of a private business house feels that he could get a copy of a Board Paper via a Parliamentarian, it is a serious breach of secrecy relating to the affairs of the Central Bank.
Anyone who has released such a paper to an outside party is liable to be imprisoned or fined or meted with both. Since it is a serious matter, the Monetary Board should immediately institute an investigation into the matter through the Criminal Investigations Department which has powers as well as facilities to do so. If, for any reason, the Board forebears it, it would be digging its own grave since it is tantamount to giving a license to those in the market to grab such vital information through underhand methods.
Universal access to CB information is a must
To permit all market participants to have information equally, the Monetary Board has adopted a disclosure policy too. Accordingly, with respect to monetary policy decisions, there is an advance release calendar being followed by the Central Bank. This is being done as a part of the new communication policy of the Bank introduced along with the objectives of the modernisation programme completed by the Bank during 2000-5. If for any reason there is a change in the date of release, that too is disclosed to the market in advance. With regard to all other important policy decisions, the market is fully kept informed via press releases and press notices.
Accordingly, any information that is not released by the Central Bank to public domain is considered prohibited information coming within the first category. Hence, if it had been done by a Central Bank officer who is entitled to receive a copy of the Board Paper in question or a member of the Monetary Board, in both cases through a Parliamentarian as alleged, he or she is guilty of an offence. It is not difficult for the detectives to follow the trail and apprehend the culprit.
CB information has economic value
Why should someone plot to obtain information pertaining to the Central Bank? That is because such information has economic value and could be used by those who get the advance information for their own profit.
Information on interest rate changes should be kept secret until it is announced formally
Take for example the monetary policy decisions of the Central Bank. Those decisions involve either reduction or increase in interest rates or tightening or loosening credit availability in the economy. If somebody has advance information about what the Central Bank would do to the country’s interest rates, he could safely maintain a portfolio or dispose the present portfolio to earn super profits or avoid losses.
For instance, suppose that the Central Bank is to increase interest rates at its next policy review meeting. If anyone has this advance information, he would immediately sell all the securities he has in his portfolio and build up a liquid cash balance. When the Central Bank increases the interest rate, the whole interest rate structure, known as the yield curve when it is plotted against the maturity period, would move upward.
With increases in interest rates, the prices of securities will fall. Those who had held onto securities would have found that they have suffered a loss. But those who had disposed of their securities in the market earlier would now buy the same bonds at a lower price thereby gaining opportunities for earning a substantial capital gain.
The opposite will happen if the Central Bank is going to reduce interest rates.
Then, the interest rate structure would move downward increasing the prices of all the securities in the market. Anyone who has advance information about this would buy securities and wait for the announcement of the policy decision. When the prices move up due to the reduction of the rate, he could sell the same at the new higher prices and amass a significant profit for himself. In both cases, he will earn super profits at the expense of all others who do not have that information.
A central bank committed to maintaining fair competition in the market cannot permit such behaviour by some exclusive members of the public. Thus, it maintains strict silence about what it is going to do to the interest rates in the country until it is announced in its regular monetary policy statements.
Information on exchange rate changes should also be kept secret
There is a similar economic value for information relating to exchange rate changes too. When the Central Bank allows the rupee to depreciate, all those who hold onto foreign currency balances will immediately earn a profit in rupee terms. Hence, if anyone has this advance information, he would immediately accumulate foreign currencies by selling rupees, known as holding a ‘long position’ in the foreign exchange portfolio.
When the depreciation takes place, he would sell the foreign exchange balance for a higher rupee value and make a profit. The opposite behaviour will take place when someone has advance information that the central bank is going to allow the rupee to appreciate in the market. Then, the person with advance information will dispose his foreign exchange portfolio and hold onto rupees. When the rupee appreciates, he would buy foreign currencies by selling rupees at a lower rate. Hence, the Central Bank would keep such information a secret until it is officially announced in the market.
Supervision reports on banks and primary dealers should also be kept secret
A similar interest could be shown by people outside the Central Bank in the reports on the supervision outcome of banks, financial institutions and primary dealers. If a report is adverse to any financial institution and there is likelihood that the Central Bank would impose penalties on that institution, there is always incentive for the institution concerned to obtain a copy of the Board paper in advance so that it could lobby with political powers to influence the Monetary Board’s decision.
If it happens, imagine the embarrassment to Board members and the frustration it would cause to officers who have prepared that Board paper. The worse will happen when the market comes to know that the confidential reports are not confidential anymore and there are ways of obtaining those reports in advance and the Monetary Board could be influenced to change its decisions.
Major changes in exchange rate policy should not be disclosed until they are implemented
This writer recalls that when the Central Bank decided to make a major change to the exchange rate in 2000 by moving into a totally freely floating exchange rate system, Governor A.S. Jayawardena saw to it that only a few people knew of the proposed policy change. Within the Central Bank, it was only the two Monetary Board members, two Deputy Governors, and two important heads of department who were privy to that information.
President Chandrika Bandaranaike Kumaratunga had been briefed as the Minister of Finance but not even her Deputy Minister. The new change was announced at 7 a.m. and the Deputy Minister of Finance was informed of the change only after making that announcement. Secrecy was maintained at all levels in this manner to prevent all outsiders from making profits out of the Central Bank’s move.
A similar secrecy was maintained when the Central Bank decided to close the bankrupt Pramuka Bank and restructure the ailing Seylan Bank later.
Those who have leaked information should be severely dealt with
It is, therefore, understandable why the head of a private company had been anxious to obtain a Monetary Board paper for himself by using a Parliamentarian. The Parliamentarian, however much he is powerful in the Government, cannot get this Board paper, unless it is released to him by a Board member or a high-level officer of the Central Bank. If the Parliamentarian had obliged the request, he has certainly put his Government to much embarrassment.
It poses serious questions about the moral values of the Parliamentarians in the country. If the Parliamentarian in question is a Government member, it dents the reputation of the Government irreparably since this Government has come to power by riding a popular wave that demanded the establishment of good governance in the country. Surely, the President and the Prime Minister cannot overlook it since it is their reputation as masters of good governance that is at stake.
Ascertain that no breach has taken place
It is in the best interest of the Monetary Board that it would get the Criminal Investigations Department to investigate into the whole affair with a view to apprehending the perpetrators within the Central Bank and among Parliamentarians. Given the damage it has done to the Central Bank, it is not a matter to be ignored at all.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at email@example.com.)