Critics say DDO mathematical gimmick
The Domestic Debt Optimisation (DDO) was put down by critics as a mathematical gimmick and being unfair to superannuation funds, but Finance Ministry (FM) officials rejected this claim, saying this was the optimal solution.
“The DDO is targeting superannuation funds. The Central Bank (CB) has to examine which option gives them the best returns and then decide. It is the 30 per cent taxation on Employee Provident Fund (EPF) that is discriminatory. The 30 per cent taxation if the EPF holders opt out of the DDO, violates Article 12(1) of the Constitution,” Manjuka Fernandopulle, a lawyer with expertise on the subject said.
FM and CB officials refuted this, saying that whatever decisions they take always go through the Attorney General’s (AG) department. “We consult the AG before we take a decision,” one official said.
He said that had the DDO entailed reducing at least 0.01 per cent from the EPF or restructuring the banking sector, the entire financial system would have been chaotic. “The critics are psychologically bankrupt because they did not expect what we presented at the DDO. This was the best optimal solution.”
Mr. Fernandopulle noting that the regulator has to get the banking sector to recapitalise and that banks’ shareholders have to sacrifice, which is what Jamaica and Ghana have done.
“How to manage liquidity is the CB’s job. The DDO in Sri Lanka was done to help only some people.”
Murtaza Jafferjee, Chairperson Advocata Institute said that if the EPF’s bond holding structure is a proxy for all superannuation funds the proposed restructuring is not a bad deal on a NPV (Net present value) basis.
Some of their low-yielding bonds are to be exchanged for higher yielding ones, he added noting that if the proposed CB law comes into being and inflation is contained within the targeted range of around 5 per cent pension fund members will earn a real balance. “The forecasted GFN (Gross financing need) targets a positive gap of 0.3 per cent of GDP, if the restructuring perimetre was widened to all bondholders, it would have provided for a lower primary balance target.”
Sustaining a primary balance target of 2.3 per cent in the current socio-political environment will be extremely challenging. Around Rs.1.9 trillion of bonds were issued during the crisis period at extremely high yields above 20 per cent, in some cases above 30 per cent. “The expectation was that they would have been restructured. The superannuation funds that held these high yielding bonds are exchanging them for lower yielding bonds, but they are also exchanging lower yielding bonds for higher yielding ones. Besides the superannuation funds, the others holding these instruments can enjoy earning real yields as high as 15-20 per cent for up to 10 years,” Mr. Jafferjee said.
Dr. Priyanga Dunusinghe, Economist, University of Colombo said that more than 70 per cent of EPF holders will receive from Rs. 2 million to Rs. 4 million which they will use for things such as construction, children’s weddings, and overseas pilgrimage etc and that the DDO will impact their basic plans.
When asked about the precarious position the banks would be in if the banking sector was also roped in for DDO, he said, “If there is a loss to the shareholders of the banks, it does not mean the banks will fail or fall. The CB has adequate tools and instruments to manage the bank run if there is one. It could set up a fund to support the banking sector with the required resources like in Ghana which got the banking sector to recapitalise.”
Noting the DDO should have shared the burden with all people, Dr. Dunusinghe said, “Why did they make the private bondholders exempt from the DDO? What about private bondholders,’ insurance etc.? It is the same instrument and not restructuring these is not fair.”
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