Sri Lanka CB may build Chinese wall between EPF and bank supervision
ECONOMYNEXT – Sri Lanka’s central bank may consider further steps to reduce perceptions of conflicts of interest in bank regulation and the purchase of shares by the Employees Provident Fund, Central Bank Governor Indrajit Coomaraswamy said.
EconomyNext questioned whether there were conflicts when the same deputy or assistant governors were assigned both departments, and if the roles should be split.
“That is something we should think about. You’re right,” Coomaraswamy said.
Concerns have been raised about EPF buying banks stocks when it is also the regulator, and that it may be privy to insider information that other market participants are not.
“In my personal opinion, I don’t think this is a good thing, but we have a legacy,” Central Bank Governor Indrajit Coomaraswamy said.
Coomaraswamy said the EPF had ‘vast holdings’ in the sector and it was not possible exit the stocks suddenly.
Sri Lanka’s EPF has only 3.3 percent of cash in stocks but wants to increase it to 6 percent with prices now at rock bottom.
Under Coomaraswamy, governance has been revamped to address earlier concerns of the EPF being a victim of pump and dump scams for both stocks and bonds.
There are even bigger conflicts in the central bank’s activities.
Around 92 percent of EPF funds are invested in government securities.
While it is duty bound to get the highest return for the members of the EPF, the central bank as the agent for selling Treasury bills and bonds also has an obligation to lower the interest rates on government securities.
Outsiders generally refer to the EPF as a ‘captive source’ indicating a general perception that the interests of the depositors have been made subservient to that of the Treasury.
There are also concerns that the desire to raise debt for the Treasury may undermine monetary policy objectives.
The government was also mulling separating the EPF from the central bank and setting up a separate trust to manage the fund.
Last year, EPF returns dipped to 9.54 percent from 10.4 percent a year earlier, the lowest since 2006. (Colombo/Jun06/2019)