EPF in the Hands of the Central Bank

When the government used the funds of Employment Provident Fund (EPF) to invest in publicly traded financial companies in 2011, civil groups and the opposition party vehemently protested against government’s move to exercise control. It became known in 2014, the government has indeed incurred losses from the ventures and the losses have to be transferred to the beneficiaries. Ironically, the new government, the very people who voiced their opinion against the moves continue to maintain shares and attempt to increase their influence over private banks. As of now, the government owns shares of 6 different privately owned banks, with stakes varying from 16.3 percent to 33.98 percent. The Central Bank’s (CB) failure to publish annual reports of the EPF since 2012 makes the whole affair of EPF and CB’s decision to invest in private financial companies increasingly dubious.

 

What Is EPF?

If you have been an employee in Sri Lanka you are aware  that a certain amount of your monthly paycheck is deducted for the EPF. The Employment Provident Fund was set-up under the Act No. 15 of 1958 as a social security scheme. The Central bank is entrusted to maintain the fund. It has grown to become the largest social security scheme in Sri Lanka amounting to 1664 billion rupees as at December 2015. The employee has to contribute 8 per cent and the employer 12 percent of the monthly salary. Therefore the entire fund comprises of the hard-earned money of Sri Lanka’s labor force. The large public outcry was initially due to jeopardizing this fund by risky investment which in-turn endangers the social security of Sri Lankans. It Appears that there are even more serious implications of CB owned shares and influencing bank decisions through government-appointed directors.

 

The Conflicts of Interest

According to the CB website, one of its objectives is to achieve financial system stability. The Central Bank oversees the financial institutions and makes sure the banks make “safe and efficient” financial decisions. Having to manage its portfolio, the CB is now playing the dual roles of the regulator and the financial institution it is supposed to regulate.  It is questionable how the CB intends to strike a balance between the drive to profit while  regulating the country’s financial environment. The CB is essentially regulating the companies owned by itself.

The CB also has to set the interest rates which directly affect the financial institutions’ daily transactions. In a situation where the CB owns banks, it is essentially setting interest rates of companies owned by itself. This does not only give rise to a conflict of interest. The financial institutions can clearly exploit the inside information and get undue advantage. In a fiercely competitive banking environment where the players are striving to gain an edge, inside information will be detrimental to the industry competition. In other words, the CB could be directly involved in creating monopolies in the banking system.

CB has already tainted its name by allegedly getting involved in a bond scam in 2015. Its stakes in private financial companies could potentially embroil the CB in yet another misuse of information. When the CB issues bonds and debentures in order to raise finances on behalf of the government, it has to act in the best interest of the people in the country. In other words, the treasury bills or bonds should be issued to the bidder that offers the lowest rate of interest. These transactions are in billions and therefore a fraction of an interest rate means a lot. The Central Bank’s portfolio comprises the stakes of the very companies that wishes to profit from the deals.

 

Unclear Rationale

The governments have had a history of not publicizing important economic reforms affecting the citizens. In defense of the claims regarding EPF, government’s response has been that the purchase of shares is a reaction to “news items alleging fraud and market manipulations in share transactions”(The Island June 23, 2012). The claim itself is vague and it appears as if the government is finding faults of other institutions in order to execute a hidden agenda. On the other hand it raises effectiveness of the Securities and Exchange commission which is in place to detect and investigate share price manipulations.

The government and the CB has gone to unprecedented lengths to tackle a market imperfection by creating a web of more serious complications. Coupled with the failure to produce annual reports of EPF for four consecutive years,  the entire affair has created an aura of extreme ambiguity. Thus, people believe the move is an attempt of some invisible hand to steal the hard earned money of workers.

Hands-Off Private Companies

When John Exter, the founder of the central bank released his reports, he forbid the CB from engaging from any profit making activities. Although the financial and the economic climate has transformed so much since then, his reasoning has only grown in its significance. Therefore the CB is now in violation of the Exter Report as well.

Regardless of any foul play, CB managing a portfolio itself is a red flag to a potential investor. The investors would not want the government to directly meddle with their decisions through government-appointed directors sitting in their board meetings. It undermines private ownership and free-market policies. It also discourages private investment and foreign direct investment. It is ironic that a party which is known for its pro-market policies has, in a way, nationalized privately owned companies by owning shares. Therefore this is a serious dampener on the government’s aim to encourage entrepreneurship and investment.

 

Possible Solution

Provident funds are widely found all around the world. One solution is to transfer the fund to an independently specialized and separate body. The body should be completely independent of the CB and independent of political influences. It resolves two problems. Firstly it relieves CB from the conflicts of interest which is the major part of the problem. This way the CB will have no barrier to hold shares of financial institutions(FI). Yet I would strongly suggest not holding shares of FI. The independent body will likely comprise of officers who have strong ties to the CB who are already experienced in managing the EPF. Thus it will not give rise to a problem like Food And Drug Administration Authority directors coming from Tyson.

Secondly this specialized team will be well versed in investment decisions thus capable of actually growing the fund and not dwindling the fund. The government has not had a very good track record of investment over the years and there are ample examples of disastrous ventures. The fund has already lost 11.7 billion of rupees due to inept and politically motivated investment decisions (Daily Mirror).The special team will comprise of investment analysts and market researchers who are geared to make strategic investment decisions. It is of utmost importance that the body is free of any political motivations. This will enable the fund to provide the beneficiaries with a healthy interest rate that would be well over the inflation rate.

While I agree that the solutions are easier said than done, given the magnitude of the problem the changes should be made to for the betterment of the economy. The governments seems to be pushing any solution to a distant horizon by adopting the same unhealthy policies the previous governments carried out. The solution will not only benefit the economy as a whole, but also would establish “good governance” that the present government pledged to uphold once they rise to power.

(* the writer Praveen Ekanayake is a graduate student of Miami University )

Will More Male Migration Produce Better Economic Gains?

 

How Vital are Remittances to the Country?

The importance of remittances has grown over the years in Sri Lanka and now it has become a determining factor of the economy. Over a quarter of the country’s labor force is abroad. The remittance statistics in 2015 show that foreign currency earned from remittances surpasses the highest earning export good which is garments.  Since remittance flows are positively correlated with the oil prices it also acts as a buffer for the oil price shocks (Lueth et al. 2007). Sri Lanka is also the highest remittance receiving country in the South Asia region. In 2009 average per capita remittance to Sri Lanka amounted to 164 US$ compared to South Asia’s average of 35$ (Ministry of Finance and Planning). In response to this significant situation, policies to make the remittance flow more economically productive are not in place.intro-remittance-blog

 

The Tragedy

In 2000 female migrant workers accounted for 75 percent of the total migrant workers abroad (Lueth et al. 2007).  This is due to the high demand for household female workers from the Middle Eastern region. The housemaids are largely unskilled and come from low income families having low marketable skills. The underprivileged and vulnerable nature of housemaids has paved the way for the violation of their rights both in the remittance receiving countries and in sending countries. There are many reported instances where the female migrant workers were physically abused by the employer and were not compensated properly. On the other hand back in their home countries their absence makes a devastating impact on the family. Their spouses lose their female counterparts and the children lose maternal love and care which is vital for early childhood growth. Thus, many migrant workers tragically end up in an even more miserable situation than they were before.

 

Policies and the Dilemma

As the public voiced their opinion against the social problems created by female migration, the government was in a dilemma, whether to curtail female foreign employment or not. Curtailing female foreign employment would hurt the economy badly. On the other hand any restriction on female migration would mean a discrimination against women’s economic freedom. The regulations came in the form of “recommendations” such as not recommending females with children under 5 years of age for foreign employment. Owing to various regulations imposed by  the Sri Lanka Bureau of Foreign Employment, the gender composition of migration is transforming.

More male migration would mean more women would be in control of income remitted to home countries. These expenditure dynamics of males and females are to play a big role in how household expenditure patterns are decided. This poses a good research question: whether the sex of the remitter makes an impact on the household budget allocations. Studies on the transformation of household expenditure pattern should be conducted in order to predict the economic impact. The research also intends to cast more light to how the remittance receiving families spend their income.

 

migration-female

(Image Courtesy: http://www.ips.lk)

Methodology and Challenges of the Research

This research intends to compare the expenditure patterns of remittance receiving families and non-remittance receiving families. Then it compares families receiving remittance from males and females. This would mean a non-random selection of the treatment and non-treated groups. In addition, the two groups involved in analysis differ in observable and unobservable characteristics. This gives rise to non-random sample selection and endogeneity problems. The most popular way of treating the possible biases is through instrumental variables (IV). But the use of IV had to be ruled out as a good IV was not found. Therefore, the preferred functional form is the Working-Lesser model. We model this as a fractional-logit model. Propensity-score matching with nearest neighbor matching is also carried out.

 

Learnings from the Research and the Way Forward

The following are the highlights of results generated from the study. Compared to non-remittance receiving families, the expenditure on housing stands out which captures expenditure for building, renovation and renting houses. The remittance receiving families tend to have a 36 percent higher budget allocation for housing category. This is a clear indication of the main financial motive of migration. It is also interesting to note that expenditure for health and education in remittance receiving families is not significantly different from non-remittance receiving families. These outcomes also confirm the finding of (IPS 2014) where only 21 percent of returnee migrants responded that they had improved their economic status. It is clear that the intentions of migrating families in general are more consumption based rather than investment based.

More interesting outcomes are seen in the gender comparison section. The male remitter houses tend to have 66 percent less budget allocation for liquor and intoxicants. Budget allocation for education rises by 35 percent in houses receiving remittances from males. Impact on both these categories help improve the quality of life and would be an investment in human capital in particular. However, the budget allocation for clothing and ceremonial expenditure is to rise by 20 percent in male remitter households.

 

Conclusion

The contribution by the migrant workers is unmistakable in the country’s economy. However, the institutional framework to maximize and prudently utilize their hard-earned income is not in place. The focus of the migrant workers should be to invest and create a stream of sustainable income rather than spending on consumption goods.  As the results suggest, the trend of more male migration will produce better economic results especially in terms of human capital development. It also indicates that higher bargaining power for women in household expenditure decisions do produce better outcomes. The government may not witness immediate results from the shift of gender composition of migration. Yet the long term effects of better access to education through higher household expenditure on education can be experienced at national and household levels.

 

References

Lueth, E., Ruiz-Arranze, M. (2007). ‘Are Workers’ Remittances a Hedge Against Shocks? The Case of Sri Lanka’ International Monetary Fund

Frankel, Jefferey A., “Are Bilateral Remittances Countercyclical?,” (October 2009). NBER Working Paper No. w15419