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Sri Lanka bond yields slightly up, spot US dollar Rs312/313
ECONOMYNEXT – A claim made in Sri Lanka’s parliament that the Employees’ Provident Fund (EPF) would lose 12 trillion rupees over 15 years as a result of a domestic debt restructuring (DDR) exercise was a misrepresentation of reality, Central Bank Governor Nandalal Weerasinghe said, defending the DDR programme as equitable.
Asked to comment on a widely publicised research by an independent think tank, which was also cited by Opposition Leader Sajith Premadasa in parliament this week, Weerasinghe told reporters that the analysis in question was built on incorrect assumptions and an “apples and oranges” comparison.
The analysis had concluded that, based on the existing average yield rate, which the study had calculated to be around 13.5 percent, the EPF would lose 12 trillion rupees by 2038.
”That assessment is highly inaccurate and misrepresents reality and facts and figures,” said Weerasinghe, adding that it was unclear how the 13.5 percent interest rate was calculated.
The EPF is Sri Lanka’s single largest fund amounting to around 3.4 trillion rupees at present and is also the largest holder of treasury bonds – about 36 percent – which in turn make up over 90 percent of the fund’s total investments.
The analysis cited by the opposition leader notes that, at this assumed compounded rate of return of 13.52 percent, the EPF’s portfolio should grow to 25.7 trillion rupees but at the offered average return of 9.1 percent, it would only grow to 13.6 trillion rupees, resulting in a 12.1 trillion-rupee loss by 2038.
Governor Weerasinghe, however, expressed scepticism of this calculation at a monthly monetary policy review on Thursday July 06.
“This claim is based on an assumption that the EPF’s treasury bond portfolio’s yield is 13.5 percent. 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 percent.
The EPF had paid around 9 percent to beneficiaries in recent years after taxes and expenses and the 13.5-percent interest rate in the analysis in question is incorrect, he said.
“Even assuming that it is correct, it’s still without tax. We maintain that it’s 11.5 percent,” he said.
“Once taxes have been paid, the remainder is given as benefits. These people have compared the 13.5 with the 9. This is apples and oranges,” he added.
The claim that 12 trillion rupees would be lost by 2038, according to Weerasinghe, is built on the assumption that a 13.5 yield rate from the existing portfolio and it would require inflation to be at 15 to 18 percent for another 15 years.
“If you discount under that assumption, you can inflate this up to any number, even a 100 trillion,” he said.
Sri Lanka’s debt, already deemed unsustainable, would continue to be so if a yield of 13.5 was expected till 2038, requiring more debt restructuring in the future. Inflation too would have to be at 15% and the government would have to go into more debt, said the central bank chief.
“This is very unrealistic and misrepresents [facts]. Either this forecast was made without an understanding of this situation or made knowingly to mislead the public. One of the two,” he said.
“Anyone can repeat what they [read somewhere else],” he added. However, he said, an organisation with some credibility must ask itself what level inflation should remain until 2038 and what rate the government should obtain credit for this projection to be accurate.
“It’s easy for anyone to mislead the public by making incorrect comparisons based on wrong assumptions,” said Weerasinghe.
He did, however, acknowledge that the EPF would have to take a hit in the form of an opportunity cost.
“According to our calculations, there could be on average a long term interest of 9.4 percent, which will come down to 9.1,” he said.
If Sri Lanka did not go ahead with its DDO plan, which was passed by parliament last week, the government would have to announce a suspension of repayment for domestic debt the same way it did for external debt, said Weerasinghe.
“Then everyone – banks, depositors, EPF members – everyone would suffer,” he said.
The EPF, which is controlled by the central bank, is expected to get 12 bonds under the DDO.
Until end 2025, the bonds will get a coupon of 12.0 percent, which will fall to 9.0 percent until maturity.
Bonds will start to mature from 2027 and be subjected to market rates. The difficulty in coming up with a projection, as for the current portfolio, is to come up with a long-term interest rate, analysts say.
The government is proposing to tax pension funds that do not exchange bonds, at 30 percent compared to the current 14 percent.
According to Weerasinghe, the EPF is now engaged in their own analysis based on hypothetical scenarios of a) going for the 30-percent tax and b) going for the DDO.
“Our current calculations indicate that there is an opportunity loss of 4 percent. If the current value is 100, by 2038, because of the DDO it’ll drop to 96. If you go for the tax, the estimated loss would be 21 percent. That 100 will then go down to 79. So the two choices are 96 and 79,” he said.
Based on the analysis cited by the opposition, on the other hand, the 100 could rise to 200.
“There is no logical foundation to this analysis and it’s one that misleads the public,” he said.
“We have told the EPF to analyse this properly and make recommendations to the Monetary Board,” he added.
The central bank chief also defended the DDO plan, which has come under fire from opposition legislators for not obtaining the consent of EPF members before taking a bigger share of the debt restructuring burden.
“There is no better solution that is fair by everyone,” he said.
The governor added that the majority’s existing bank deposits also have to be taken into consideration.
“If you’re a member of the EPF, is it important to you to protect your existing funds to live now or to protect your future pension? To protect your pension, you have to live now,” he said.
“If there was a bank run, everyone including EPF members would lose what they currently have as well as their EPF,” he added.
The government’s domestic debt restructuring plan, as it exists now, balances these two scenarios and strives to protect the assets of all citizens, according to Weerasinghe.
“You have to consider the entire picture. Anyone is welcome to make alternative proposals, but we have so far not seen any other equitable proposal.
“It’s easy for anyone to nitpick and mislead the public. That’s all I have to say,” he said. (Colombo/Jul07/2023)
