In October 2013 the Court of Appeal dismissed my argument that the PAP government’s US$4 billion line of credit to the IMF needed Parliamentary and Presidential approval as required under Article 144(1) of the Constitution. The learned judges ruled that I had failed to make a prima facie case and that furthermore I lacked standing to challenge the government. The judges accepted without question the AG’s arguments that a loan was an asset and not a liability and took the opportunity to belittle my knowledge of finance at the same time. I  had  argued that a loan commitment was a liability and not an asset.  To quote from my article criticising the Appeal Court judgement:

I produced evidence from a wide variety of sources, including the US Federal Deposit Insurance Corporation’s Manual, the Bank of England’s Yellow Folder and the last published accounts of J P Morgan, the leading US bank, to show that banks were required to record loan commitments as contingent liabilities on their balance sheet. As the judges mention, I pointed out that the UK Chancellor of the Exchequer himself referred to the UK’s loan commitment to the IMF as a “contingent liability.”

This is reinforced by the fact that the interest rate on loans made to the IMF is virtually zero. It is therefore inexplicable how Singapore’s IMF loan commitment could be considered an asset.  Since the government pays CPF holders 4% to borrow their money the IMF loan, if drawn upon, must be a money-losing proposition from the moment it is drawn down.

In support of the argument that the loan commitment was a liability not an asset I cited US Statement of Financial Accounting Standards 133.  This requires that loan commitments be treated as options on bank balance sheets and marked to market. A loan commitment is in the nature of a call option granted to a potential borrower that gives them the freedom to draw on the money at a time of their choosing. An option cannot be worth less than zero and should normally have a positive value while the writer of the option would have to record a corresponding liability. The option could not be worth less than the present value of the difference between what it would cost the IMF to borrow in the open market and the interest rate that it would pay on the loan if drawn down (effectively zero).

Yet the judges chose to misunderstand my point and claim that they were surprised that as an economist I did not understand the difference between a loan commitment and an option. There may be a legal difference but clearly in economic terms a loan commitment is an option because the borrower has the right to draw down the loan but is not obliged to do so. It is the learned judges who demonstrate their basic ignorance of modern finance theory.

 However on 21 January 2014 Minister Tharman  dropped a bombshell in Parliament when he moved the following motion in Parliament with reference to our subscription to the International Bank for Reconstruction and Development.. In the following he explains how the government accounts for the loan commitment and this new explanation is in complete contradiction  to the information given by the MOF and the basis  on which the government had won its case . Both versions can’t be correct. Read the motion and see for yourselves.

“That this Parliament, in accordance with Section 7(3) of the Bretton Woods Agreements Act (Chapter 27 of the 2012 Revised Edition), resolves that the subscription of Singapore to the International Bank for Reconstruction and Development be increased to a sum not exceeding Six Hundred and Seventy-Two Million United States dollars (US$672 million).”

 In support of the motion he went on to say that “we will be paying 6%, or US$38 million, as paid-in capital” while  “The remaining 94%, known as callable capital, will not be drawn by the IBRD except in extreme circumstances, when it cannot meet its obligations on borrowings or guarantees.  To date, the IBRD has never had to call on the callable capital.  It is an AAA-rated institution with a sound balance sheet for over 50 years.  Nevertheless, the full increase in Singapore’s subscription to IBRD’s capital will be charged to the Consolidated Fund, as the callable capital represents an increase in the Government’s financial liabilities.”

 Please refer to the sentence in italics.  How is callable capital fundamentally different from a loan commitment? Both represent an option given, in one case to the IBRD and in the other case to the IMF, to call upon the Singapore government to provide the capital in the first case and in the second case to make the loan.  In his Parliamentary speech Tharman points out that  “To date, the IBRD has never had to call on the callable capital.  It is an AAA-rated institution with a sound balance sheet for over 50 years”.

This is how Tharman describes the US$4 billion line of credit when answering a tame Parliamentary question on 12 May 2012 from a subordinate member of his Jurong GRC team:

4  More than 30 countries including Singapore have so far committed to provide bilateral loans to the IMF, amounting to more than US$430 billion as at end-April 2012. Singapore has committed to the IMF a contingent line of credit worth US4 billion as part of this international effort.

5   These are however temporary resources, provided to the IMF in advance of the expected increase in its permanent capital subscriptions (or quota subscriptions) that will be decided in early 2014.  Participating in the current round of bilateral contributions to the IMF will in effect bring forward part or all of Singapore’s likely share of the increase in the IMF’s capital base in 2014.

6   Singapore’s US$4 billion contingent line of credit to the IMF means that  Singapore is expected to lend the funds when the IMF considers necessary. 

 Again the italicized sentence is highly significant. If the US$4 billion contingent line of credit is to become part or all of Singapore’s likely share of the increase in the IMF’s capital base in 2014 then how is it different from the callable capital portion of the increase in Singapore’s subscription to the IBRD. Also note the last sentence which states that Singapore is committed to provide the funds when asked to do so by the IMF.

Tharman’s explanation means that I did not need to bother to go through a lengthy citing of precedents from other countries and  standards set by accounting bodies. The government uses the same accounting treatment. Had I been able to cross-examine the FInance Minister or one of his officials or submit written questions this would have been established. However the lawyer who represented me previously before I decided to argue the case myself advised me this was not possible. What this new information makes clear is that in order to win its case and prevent embarrassment the AG pretended that the loan commitment (or contingent line of credit) was an asset and not a liability. The government succeeded in pulling the wool over the eyes of the judges.  However the judges, like spectators at a magic show, were happy to be taken in by this gross misdirection , “citing former CJ Chan Sek Kheong’s “green-light” theory of administrative law”  and “saying there has to be “extremely exceptional instances of very grave and serious breaches of legality” to warrant allowing an action by an individual in the public interest.” If this is not a very grave and serious breach of legality then what is?

Now we have ended up with a situation where the government, and the Finance Minister, have been caught out in misrepresenting and lying in court in order to get away with breaking a Constitutional provision that it itself drafted.  It is demonstrative of the contempt the PAP feel for Singaporeans and their belief that they are above the law. In any democracy the Finance Minister would be forced to resign and might face criminal charges. Unfortunately the judiciary has now come to the rescue of the executive by ruling that we have no  locus standi  to challenge illegal government actions.  The PAP government can safely continue its long tradition of doing as it pleases without bothering with such niceties as accountability, transparency, rule of law or even simple honesty.

Published by kjeyaretnam

I'm a Singaporean economist who became an opposition activist. I blog to provide an alternative to the porkies that the Pinkies tell. It just so happens that my alternative is the truth. That's why I've never been sued in any civil or criminal court no matter how hard hitting my criticism. I'm quoted and interviewed and asked to speak across the world but largely censored in Singapore in an effort to silence my political opinions. The left hate me because they think I split their vote and because I eschew their outmoded economic models. Models that don't work. The Right and the Conservatives hate me because I'm a liberal. I'm not sure what the middle think of me. I don't think there are more than a handful of people in the middle, here in Singapore. I'm a Singaporean born and bred, dual heritage, my parents Singaporean established here before the State of Singapore was created. I'm not Eurasian. I read economics at Cambridge and could be broadly described as from the Keynesian school but I believe in interventions. I was formerly a successful hedge fund manager. After economics and politics my greatest interests are history, film and Makan. I run but I run so I can eat like a Singaporean. View all posts by kjeyaretnam