"I had sent a letter to the Chairman of the PAC, Dr. Sarath Amunugama (Senior Minister of International Financial Cooperation), last January asking for the committee to summon officials of the Central Bank to answer burning questions regarding its involvement in both administrating the EPF and using it to invest in stocks of banks and financial institutions it was regulating. Up to now, nothing has happened and the government and its cronies continue to gain from these controversial transactions," Dr. De Silva said, addressing a news conference last morning, a day after a damning review released by international ratings agency Standard and Poor’s.
"Dr. Amunugama and DEW Gunasekara (Chairman of the Committee on Public Enterprises) have both made significant contributions to improving governance, but the PAC is dragging its feet and is yet to summon the Central Bank to answer to the Parliament. The questions we have are relevant because the EPF is not the government’s, nor the Central Bank’s, private property, but the hard earned monies of our workers. It is my money and your money. It is the people’s money and they have the right to know how it is being invested," Dr. De Silva said.
According to an ‘Investment Policy and Standards of Professional Conduct’ formulated by the Central Bank in 2002, it was deemed necessary not to allow the EPF invest in banking stocks for legal implications that could arise such as the possibility of conflict of interest, insider trading and being open to SEC regulation. However, this was changed in 2009.
The Central Bank has time and time again explained its stance on the EPF issue, going as far as to accuse Dr. De Silva of trying to destabilise the financial system.
"I am not the one who is trying to destabilise the financial system. The Central Bank and government’s own actions have already done that," he said referring to the recent review of the economy and banking system by Standard and Poor’s (see yesterday’s The Island Financial Review).
Standard and Poor’s (S&P) said the economy and banking system was at high risk and when on to deliver a blow to the Central Bank: "Our industry risk score of ‘7’ for Sri Lanka is based on our opinion that the country faces "very high risk" in its institutional framework, "high risk" in its competitive dynamics, and "intermediate risk" in its system-wide funding.
"We view the banking regulations in Sri Lanka as somewhat weaker than international standards. Governance and transparency of banks are weak by global standards. Sri Lanka adopted a standardized approach of Basel II in 2008, with capital requirements higher than global requirements. The key regulations for banks seem sufficient. However, finance companies are less regulated, in our view. This is despite the December 2008 collapse of a finance company triggering a run on a bank in that group."
S&P further said that under the existing legislation, banks in Sri Lanka are subject to on-site examinations by the banking sector regulator at least once every two years, which is not adequate.
"We believe the frequency of on-site supervision may not be sufficient for the regulator to quickly detect risk build-ups. Moreover, we see a potential conflict of interest in the central bank’s role. In addition to policy formulation and supervision of banks, the monetary board of the central bank also oversees Employees’ Provident Fund investments. The fund is a large investor in Sri Lankan banking stocks," S&P said.
Dr. De Silva said such reviews were damaging investor confidence.
"The government should not shoot the messenger but focus its energies in improving good governance, transparency and macroeconomic management," he said.