Sri Lanka central bank governor dismisses concerns over projected losses for EPF due to domestic debt restructuring

Sri Lanka's central bank Governor Nandalal Weerasinghe has defended the government's recently approved domestic debt restructuring (DDR) plan by dismissing the opposition's concerns that the Employees’ Provident Fund (EPF) would lose Rs 12 trillion by 2038 due to the decision.

The claim that the EPF would lose Rs 12 trillion over 15 years as a result of the exercise was made by opposition leader Sajith Premadasa in Parliament this week, citing a widely publicised research by an independent think tank, the Economy Next newspaper reported on Friday.

Sri Lanka's parliamentary oversight committee comprising members from both government and opposition on June 30 approved the proposed domestic debt restructuring (DDR) plan with certain amendments.

Weerasinghe at a monthly monetary policy review on Thursday told the media that the analysis in question was built on incorrect assumptions and an “apples and oranges” comparison, the report said.

He defended the DDR programme as equitable and said that the research claim was a misrepresentation of reality.

The analysis concluded that, based on the current average yield rate, which the study had calculated to be around 13.5 per cent, the EPF would lose Rs 12 trillion by 2038.

”That assessment is highly inaccurate and misrepresents reality and facts and figures,” Weerasinghe was quoted as saying who added that it was unclear how the 13.5 per cent interest rate was calculated.

“This claim is based on the assumption that the EPF’s treasury bond portfolio’s yield is 13.5 per cent. I don’t know where that came from,” he said, noting that the EPF is a medium to long-term fund whose current average yield is 11.5 per cent.

Currently, the EPF is Sri Lanka’s single largest fund amounting to around Rs 3.4 trillion and is also the largest holder of treasury bonds – about 36 per cent – which in turn make up over 90 per cent of the fund’s total investments, the report said.

The EPF is managed by the central bank and concerns have been raised that its yield is too low and keeping it under central bank management is a conflict of interest as the agency is also charged with selling government debt and that it is a ‘captive fund’.

Weerasinghe said that according to the current calculations, there is an opportunity loss of 4 per cent.

''If the current value is 100, by 2038, because of the DDR it’ll drop to 96. If you go for the tax, the estimated loss would be 21 per cent. That 100 will then go down to 79. So the two choices are 96 and 79,” he said.

“The EPF is a medium to long-term fund. Its average yield at the moment is 11.5 per cent,” Governor Weerasinghe said.

''We have told the EPF to analyse this properly and make recommendations to the Monetary Board,” he added.

Sri Lanka’s banking and finance sector feared for the worse as the government set about restructuring the local debt of USD 42 billion, which is more than its external debt component.

The parallel negotiations with the external creditors are ongoing in terms of the International Monetary Fund's bailout conditions for a nearly USD 3 billion bailout over 4 years.

Sri Lanka, which announced its first-ever sovereign default in April 2022, has negotiated with the IMF for a bailout of USD 2.9 billion.

The island nation is facing its worst economic crisis in history due to a shortage of foreign exchange reserves.

An imperative in the IMF bailout is to restructure external debt, which needs to be completed by September.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)