Sri Lanka in Uncharted Waters as Central Banker’s Term Ends

(Bloomberg) -- Sri Lanka's central bank finds itself in uncharted territory as the government failed to name a successor to Governor Arjuna Mahendran, whose term ended Thursday.

“The bank has never been in this situation in its entire history,” said Deputy Governor Nandalal Weerasinghe. “If we want to intervene in the market, we will have to get monetary board approval, even for interest rates, open market operations, payment facilities and public debt.”

Despite saying on Wednesday that an announcement was only hours away, President Maithripala Sirisena hadn't appointed a replacement as of 10:50 a.m. on Friday. The rupee snapped three days of gains, weakening 0.2 percent to 146.20 per dollar in Colombo.

Mahendran's successor will have to navigate the central bank through a $1.5 billion loan program from the International Monetary Fund at a time of increased volatility in global financial markets.

“If it doesn't drag on, it is not a worry for markets,” Sanjeewa Fernando, a strategist at CT CLSA Securities, said on Thursday. “But the fact that the government could not make a decision on time can escalate foreign investor perception of a lack of cohesion."

Nepotism Allegations

Mahendran has said he won't seek a second term until cleared of allegations of nepotism. He had faced allegations that his son-in-law -- head of a local brokerage -- benefited unduly from sovereign bond sales. He was also accused of lavish personal spending on his official expense account.

A government panel probing the debt auctions last year found no involvement by Mahendran and the central bank rejected allegations that he misused public funds. The Committee on Public Enterprises, which monitors financial discipline in state organizations, opened a fresh investigation in 2016 and anti-corruption activists have held street protests seeking Mahendran's ouster.

However some analysts -- such as Sasha Riser-Kositsky at Eurasia Group -- say Mahendran was caught between three-way tensions within factions of Sirisena's party and its coalition partner.

If Sirisena's choice of governor is based on loyalty to his party rather than seniority and competency, "it is unlikely that investors will be impressed as this will not shed the perception of nepotism that has plagued Mahendran's term, and may in fact add to it," Wu Mingze, a foreign-exchange trader in Singapore at INTL FCStone Inc., a Nasdaq-listed global payments service provider, said by e-mail. 

The new governor will probably be in office for a year, following which the government will "reconsider," junior Finance Minister Lakshman Yapa Abeywardena said on Wednesday.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net. To contact the editors responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net, Jeanette Rodrigues