* The real problem: No firewall between CB and govt., points out economist…and also the Central Bank!
Opposition lawmaker and consultant economist Dr. Harsha De Silva charged yesterday (28) that the EPF had lost Rs. 12 billion from investments in the Colombo Stock Exchange (CSE), but an economist suggests the opposition is probably barking up the wrong tree.
While controversies still surround the EPF issue, an economist pointed out that the internal firewalls in the Central Bank have not been effective in preventing conflict of interest because the government has time and time again compromised the independence of the Central Bank.
The Central Bank at times could not affectively carry out its mandate of maintaining price stability because of the borrowing habits of the government and these borrowings are managed by the Public Debt Department of the Central Bank.
"Forget about the Central Bank’s internal firewalls to deal with conflict of interest, because the firewall between the government and the Central Bank is non existent and the bank’s independence constantly compromised," an economist said, not wanting to be named.
Dr. De Silva fired another volley at the Central Bank yesterday.
"Notwithstanding the almost daily statements by the Employees Provident Fund (EPF) defending its investments in the Colombo Stock Exchange (CSE) violating its own published ‘Investment Guidelines’ it has now been revealed that the EPF share portfolio has made losses to the tune of a staggering Rs 12.2 billion," Dr. De Silva said in a statement issued yesterday.
"The figures are from the list of EPF investments in the CSE as at 20 June 2012 tabled by Sarath Amunugama as a partial response to a question raised by Ranil Wickremasinghe under Standing Order 23(2) raised on 21 June 2012," he said. (see yesterday’s issue of The Island Financial Review)
"The losses made on just the 6 stocks listed on the Secondary Board of the CSE in violation of the guideline that investments should be made only on ‘blue chips,’ has resulted in a loss of Rs. 2.7 billion or 22.5 percent of the total loss. Of this amount, the largest losses are from the investments in Laugfs amounting to Rs 1.8 billion, Vallibel One amounting to Rs 740 million and Lighthouse Hotels amounting to Rs 87 million. Some of the other massive losses are from the investments in LOLC Rs 1 billion, Browns Rs 945 million, Ceylon Grain Elevators Rs 713 million and Galadari Hotels Rs 470 million.
"Besides investigating the governance issues alluded to by the global rating agency S&P in issuing a very high risk rating for the entire banking system of the country the UNP will continue to push for an independent investigation in to the transactions of the entire EPF stock portfolio and thereafter for legal action in the event persons are found to have committed securities fraud. In the meantime we will assert that officials of the EPF Department of the Central Bank be summoned urgently to the Public Accounts Committee of Parliament to answer queries on alleged improper transactions at the CSE over the last two years and general queries for the last six years," Dr. De Silva said.
According to data tabled in Parliament the EPF has earned dividends amounting to Rs. 845 million so far this year and had made capital gains amounting to Rs. 879 million. In 2011, dividends earned amounted to Rs. 1,255 million, as against Rs. 594 million in 2010, and capital gains amounted to Rs. 604, as against Rs. 665 million in 2010.
In a statement issued last May, the Central Bank said the EPF investments in the CSE were with a view to gaining long term benefits, and that short term ups and downs would have to be expected because this was how a typical capital market behaved.
The Central Bank has several times explained at length the legality and validity of EPF investments in the CSE.
"But perhaps the bank needs to divulge more information. Why were certain stocks picked in the first place for instance? It is only natural that the government’s and Central Bank’s behaviour in this regard created only doubts and suspicion," an economist said, not wanting to be named, but added, "Perhaps Dr. De Silva is barking up the wrong tree."
The Central Bank has said there were internal firewalls to prevent conflict of interest between the EPF and the Central Bank, and each and every department in the Central Bank, for example the Public Debt Department of the Central Bank which manages the government’s debt portfolio.
"The Public Debt Department of the Central Bank sometimes acts in contradiction to the very mandate of the Central Bank, which is maintaining price stability, by printing money for the government which puts pressure on inflation and interest rates.
"The Fiscal Responsibility Act was supposed to be a safeguard against this but it has never been implemented. So how confident can the public be of firewall between the EPF and Central Bank, when the firewall between the Public Debt Department and the rest of the bank is prone to failure? Even if this can be trusted and its credibility secure, the firewall between the government and the Central Bank certainly cannot be trusted.
"Certain politicians are harsh on the Central Bank, but I think it is the government’s responsibility for the bad sentiments that have been created over the issue. One cannot blame the Central Bank for printing money when the blame lies with the government. Likewise, these EPF deals raise doubts as to whether these are for the EPF members or a chance for the state to interfere in the private sector. More transparency, this is the only answer. Explain the EPF investments one by one and be done with it," the economist urged the Central Bank.
The breakdown of the firewall between the government and the Central Bank is best described in the Central Bank’s own words.
"It has been observed that more often, the government borrowing from the banking system has far exceeded its original targets by a substantial amount posing major challenges to the monetary authority in the conduct of monetary policy.
"In addition, the higher domestic borrowings, especially to meet recurrent expenditures, pre-empts the available resources for public investment, thereby seriously affecting the future growth potential of the country, which is a huge opportunity cost compared to the benefits that can accrue to the country from capital investments in the future," the Central Bank said in its 2008 Annual Report.
In May 2010, a top official of the Central Bank again highlighted the breakdown of the firewall between the Central Bank and government.
C. J. P. Siriwardena, then Superintendent Central Bank Public Debt Department said: "Each time the budget deficit increases by 1 percent, the net borrowing requirement of the government increases by Rs. 54 billion and the debt stock increases by this same amount. If interest rates increase by 1 percent, the government’s expenditure on interest payments would increase by Rs. 10 billion and if the rupee depreciates by 1 percent it would cost the government Rs. 9 billion," Siriwarndena said.
"This is why it is important for the government to bring down the budget deficit to sustainable levels so that interest rates and inflation can be maintained at low levels," he said addressing a forum at the Central Bank in the presence of Economic Development Minister Basil Rajapaksa.
Earlier that same year, Central Bank Governor Ajith Nivard Cabraal warned the government that "reckless spending" would out pressure on inflation and interest rates and squeeze out finances for the private sector.
As previously reported in these pages, the budget deficit target for the first quarter of this year is nearly half of the full year target, and the government’s net market borrowing limits for the year have been exceeded within the first five months of the year.
And While the country is trying its best to move out of a balance of payments crisis brought upon by higher than expected credit growth last year, loans continued to surge during the first four months of this year with loans to the government from the Monetary Authority, or Central Bank, increasing 33 percent year-to-date and 257.3 percent year-on-year as at end April 2012, data recently released by the Central Bank showed.