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Sri Lanka’s UNP for share owning democracy with borrowed money

ECONOMYNEXT – In a bizarre election promise Sri Lanka’s United National Party has proposed to provide half a million rupees of credit to small investors to play the stock market by getting into debt.

In a manifesto for upcoming parliamentary polls in August, the ruling UNP said it wanted to increase asset ownership among the public.

"Small investors will be given credit facilities of 500,000 rupees to encourage them to invest in stocks," the manifesto said.

"We will create broad-based share owning democracy."

The manifesto did not say which banks will give the loans for stocks or whether they were talking about margin trading or longer term loans.

In Sri Lanka many seasoned investors lost money through margin trading because they failed to exit with a small loss when prices went against them and instead held on to the shares as if they had a long term loan.

Economic analysts say people should not be given incentives to borrow money and invest in stocks, which is a very sophisticated game in which even seasoned investors lose money.

Instead of speculating people should invest a part of their savings in stock on a long term basis, as stock markets move up and down in the short term.

Loans given to buy stocks can also de-stabilize banking systems. Credit funded stock purchases – which become worse when governments print money – are a key driver of asset price bubbles and economic collapses.

It was the UNP in the 1990s which helped formalize the Colombo Stock Exchange and set up the Securities and Exchange Commission to regulate the market.

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UNP led administrations in the 1980s and Sri Lanka Freedom Party led administrations in the 1990s also privatized enterprises reducing future opportunities for corruption and broke state monopolies giving economic freedoms to the poorest of the poor.

Due to the privatization of textiles and telephone utilities in particular – especially through the stock markets – the poorest Sri Lankans have benefitted most with cheap and high quality (non-kerosene smelling) cloth and cheap telephone calls.

Long-serving employees of some of the firms which were bought by well-known foreign companies, such as Ceylon Oxygen also became rich overnight as the stocks were listed.

Once loss-making firms became tax-payers.

The Rajapaksa administration however backed by ideology promoted by parties such as the Janatha Vimukthi Peramuna took back enterprises such as SriLankan Airlines and Shell Gas, and put their henchmen in to make large losses or siphon out money.

The current administration is continuing with the policy and says privatization is a banned word.

The manifesto also said freehold ownership will be given to owners of state housing schemes. The UNP also created large housing schemes during the 1980s.

At that time due to money printing and deficit spending, inflation and interest rates were high, making it difficult for many people to borrow and build houses. (Colombo/July27/2015 – Update II)
 

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