Domestic debt restructuring strategy comes under public scrutiny
View(s):The government has unveiled a strategy to restructure the country’s domestic debt, as the island nation attempts to recover from its worst-ever economic crisis while sticking to the International Monetary Fund’s (IMF) directions to come out from the deep debt abyss.
The strategy focuses only on restructuring treasury bills and bonds under the Central Bank of Sri Lanka, along with superannuation funds such as the Employees Provident Fund and Employees’ Trust Fund under the government.
Despite the repeated appeals by President Ranil Wickremesinghe along with Treasury Secretary Mahinda Siriwardena from all political parties, officials and trade unions not to disrupt the ongoing economic reforms, public pressure is mounting against the Domestic Debt Optimisation (DDR) strategy without extending their support to the proposed process.
Several concerns have been expressed by economic experts on the proposed DDR compelling the Finance Ministry to alleviate public fears and concerns of the impact and after effect on banks and pension funds such as EPF and ETF.
The main concern of the proposed DDR is the attempt to limit interest payments to a mere 9 per cent for the next 16 years (EPF), several former senior public officials disclosed adding that it is lower than the current average interest rate of around 13.5 per cent putting immense pressure on employees who rely on their EPF savings for a secure future.
Private sector employees, unlike their public sector counterparts, cannot depend on a pension after 20 years of service. The reduced returns on their EPF investments threaten their livelihood during retirement.
According to the Finance Ministry, Treasury bonds of superannuation pension funds would be exchanged 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.
In two phases, central bank-held treasury bills are to be converted to treasury bonds maturing between 2029 and 2038.
The EPF will be greatly affected by this action of reducing the interest rate given to debts of the government taken via treasury bonds from the superannuation fund to 9 .1 percent from the current 13.5 percent, an economist noted.
He added that if the 13.5 per cent interest rate continues till the year 2038, then the value of the EPF will go up to Rs.25 trillion from the percent value of Rs.3.46 trillion.
Sri Lanka is offering to swap debt in provident funds for new instruments with a longer duration in line with an Extended Fund Facility (EFF) of the IMF.
“It is justified by the ambitious nature of these targets, the need to manage Sri Lanka’s public debt rollover risks in the future and the imperative of ensuring a fair contribution from all creditors to the resolution of
Sri Lanka’s debt problem, without however jeopardizing the stability of the domestic financial system,” the Finance Ministry said in a statement.
The DDR’s effect extends beyond the EPF and directly affects the wider population. Although the government assures that the DDR will not affect local bank accounts, it purposely overlooks that nearly half of these accounts consist of loans, leases, advances, or overdrafts, several general managers of banks complained.
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