Three new laws soon for DDO
Officials at a media briefing on Thursday explaining the DDO process.
The Central Bank (CB) is working with the Ministry of Finance to implement three pieces of legislation to execute Domestic Debt Optimisation (DDO), a condition under the IMF programme to restructure US$ 19.8 billion of the $42.1 billion domestic debt, officials said.
Amendments to the Banking Act, Appropriation Act, and the Inland Revenue Act will be issued, State Minister of Finance Shehan Semasinghe told the Business Times on Friday. He said the DDO which focuses on restructuring treasury bills and bonds under the CB will be launched by the regulator early this month. The Cabinet of Ministers at its meeting on Monday approved to direct the Legal Draftsman to draft a statute for the amendment of the Banking Act No. 30 of 1988.
An amendment to the Banking Act to convert treasury bills (T-bills) to Treasury Bonds as stipulated by the DDO was submitted to Parliament and is to be approved next month.
The DDO proposal seeks a rescheduling of debt, extensions on repayment times, and reduced interest on Sri Lankan government debt, including those held by pension funds. It will exchange treasury bonds of superannuation pension funds for longer maturity treasury bonds from 2027 to 2038, with a step-down coupon structure of 12 per cent until 2025 and 9 per cent until maturity. Currently, there is Rs. 4.1 trillion in treasury bills, with 62.4 per cent held by the CB. There are Rs. 8.7 trillion in treasury bonds, with 36.5 per cent held by the superannuation fund and approximately 36 per cent held by banks. Insurance companies and private individuals own the remaining portion.
The government has also proposed an amendment to the Inland Revenue Act to incentivise the superannuation fund holders to opt for the DDO. The tax rate on the interest income of the pension funds is set at 14 per cent under the DDO and the amendment is to affect the 30 per cent standard rate for this if the holders do not agree to the DDO. A CB official said that these laws will take at least two months because they will be passed through Parliament.
CB governor Dr. Nandalal Weerasinghe told reporters on Thursday that T-bills and treasury bond holdings of the banking sector have been omitted from the domestic debt restructuring owing to the significant stress on the banking sector at present due to growing non-performing loans, the impact of external debt restructuring, and high taxation.
He said the EPF and the Employees’ Trust Fund (ETF) are subject to a 14 per cent tax rate, which is lower than the tax rate imposed on banks. The proposal suggests retrieving all existing treasury bonds from these funds and issuing new bonds in return.
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