Business Times

CB rejects accusations that it has no authority to invest EPF funds

The Central Bank this week rejected accusations that it has no authority under the guidelines set up by the Monetary Board – to invest money from the Employees’ Provident Fund (EPF) in the stock market.
In a statement, the Bank referred to such claims made by ‘a spokesman for a certain political party’ and didn’t name the individual though it is well known that it was Dr Harsha de Silva, UNP parliamentarian and economist that made the claim.

“In terms of the EPF Act, the Monetary Board of the Central Bank of Sri Lanka has been entrusted with the responsibility of managing the Fund as its custodian, while the general administration of the Fund has been vested with the Commissioner of Labour. The overall objective of the fund in investing its money is to provide a reasonable return to members, while safeguarding and enhancing the value of the Fund. In terms of the section 5(e) of the EPF Act, Monetary Board may invest the moneys of the Fund in such securities as the Monetary Board may consider fit and may sell such securities. Accordingly, the EPF clearly has the authority to make investments in the share market, including the banking and financial sectors,” the statement said.

It said the EPF, as Sri Lanka’s biggest fund, has provided attractive returns to the EPF members while safeguarding their investment. The banking and financial sector is the largest sector in the Sri Lankan equity market with more than 20 percent of the total market capitalization. This sector has always been performing exceptionally well and therefore, since 2005, the EPF had invested in the sector with the intention of creating more wealth for the millions of EPF members in the long-term, it said.

“Presently, the EPF’s exposure to the banking sector is around 1 % of its total portfolio. In addition to the banking sector, the EPF has also invested in other sectors including construction and engineering, manufacturing, hotel and travel, telecommunication, and diversified holdings in the Colombo Stock Exchange, and in other instruments such as debentures, mortgage backed securities and selected private equities,” the statement added. Currently, more than 95 % of the EPF investments are in government paper and this trend is expected to continue over the next few years as well. “However, if the government were to reduce its fiscal deficit, over the next few years (as they have announced), there is a strong possibility that the EPF investment options of investing in government paper could diminish to some extent in the medium to long term.

In that scenario, interest rates could decline further and hence the returns to the members could reduce proportionately, although such returns may be reasonably above the inflation rate. In that scenario, there is justification for a slight shift towards other instruments which provide higher yields, so that the returns of the EPF are maintained at reasonable levels in the medium to long term,” the Bank said.

The Monetary Board assured the public that, as has been done for more than 50 years in the past, the EPF would discharge its investment responsibilities and duties in accordance with the stipulated rules and regulations in a professional and fair manner, providing a positive real rate of return to all its members while safeguarding the wealth of the EPF, it said.

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