Since late 2010, the Sri Lankan government has made much of the country’s soaring stock market as indicative of a post-war boom.
The claim has also been repeated by some international analysts.
However even by October 2010, it was becoming clear that the stock index was being boosted by the government itself.
State-owned pension funds were doing much of the buying - even as foreign investors have been largely taking their funds out.
See our earlier post ‘Sri Lanka’s stocks: a closer look’
But now the chickens are coming home to roost.
As Central Bank governor Nivard Cabraal disingenuously put it early last year (see p2 here):
“The EPF has, of late, increased its exposure in the Sri Lankan equity market which was recently acclaimed as one of the best performing stock markets in the world.”
Now much of the funds of the Employees Trust Fund (ETF) and Employees Provident Fund (EPF) are tied up in Sri Lankan stocks.
(All private sector employers in Sri Lanka have long had to contribute 12% of employees’ earnings to the EPF and at least 3% to the ETF. Employees themselves also contribute 8% of earnings to EPF. State sector workers, however, get their pensions without any contributions.)
Last week the leader of the main opposition UNP (United National Party), Ranil Wickremesinghe, warned that the stock market would collapse if these monies were withdrawn. (See Sunday Times’ report here)
Or, put another way, if the stock market collapses, the contributions to the ETF and EPF now ‘invested’ in stocks would vanish.
Recently, the cash-strapped government has come up with a new extraction scheme, in the form of the Private Sector Pensions Bill.
The Bill has triggered widespread protest and strikes, but the government is determined to force it though. (See also this survey)
Wickremesinghe accused the government of using the new scheme to extract funds to pay back a controversial and expensive loan taken from HSBC bank, and to settle monies lost in a disastrous oil hedging deal.
A Sri Lankan economist, Harsha De Silva, has pointed out that the Bill has nothing to do with pensions. (see his interview here)
“First of all let me emphasize that it is not a pension bill. A pension is a perpetual payment that will go to the receiver, but here the pensions will only be paid as long as there are funds in the employees account.
“The plan is to use the funds for [government's] investment activities whilst the funds in the accounts remain unchanged.”
Meanwhile, the IMF (International Monetary Fund) has rejected accusations that it is behind the government’s Pensions Bill.
"The private sector pension fund initiative was not at all part of our program [with the government]," Brian Aitken who heads an IMF mission to Sri Lanka said.
"In this particular case I have to be clear, because I know that there could be room for confusion. We had nothing to do with the design or the implementation of this particular pension reform bill."
See the rest of his comments here.
