ECONOMYNEXT – The Central Bank of Sri Lanka (CBSL) informed the members of the island nation’s largest pension scheme, Employees Provident Fund (EPF) that it has opted for the government’s domestic debt optimization (DDO) option with a long-term view in the best interest of the members.
It said the two options given to the EPF under the parliament approved DDO were exchange option and non-exchange option.
A central bank’s analysis showed the return on EPF could fall to as low as 6.79 percent if the DDO option was not chosen within the next 12 years as against 8.02 percent if opted for DDO.
Under exchange option, the EPF can exchange a minimum required amount of existing Treasury bonds with 12 new Treasury bond series that mature from 2027 to 2038 and the new bonds are offered with a coupon rate of 12 percent per annum until 2026 and 9 percent thereafter. The EPF would continue to pay income tax at 14 percent per annum on its taxable income attributable from its Treasury bond portfolio.
Under the non-exchange option, the existing Treasury bonds will be subject to a 30 percent tax rate on the taxable income of the Treasury bond portfolio.
“…the Monetary Board of the CBSL as the custodian of the EPF, having considered the two options available, decided to opt for the Debt Exchange offer with a long-term view in the best interest of the members of the Fund,” the central bank said in a statement.
The EPF has tendered 2,667.5 billion face value of Treasury bonds for debt exchange, including an additional 149 billion rupees in addition to the minimum participation requirement considering its comparative benefits to the Fund, it said.
“The Government has accepted the same and issued new Treasury Bonds to EPF with an equivalent face value.”
President Ranil Wickremesunghe’s government got the parliament approval for the DDO early in July, but it was delayed due parliament could not amend the Inland Revenue Act in tandem with the DDO following fundamental rights cases filed by opposition and activists.
The Supreme Court cleared the legal barrier early this month.
The central bank said the decision was taken after careful analysis by experts.
“The Monetary Board envisaged that out of the two options, Debt Exchange is distinctly the better option considering the assessments that have been carried out on the basis of several prudent and realistic assumptions,” it said.
“Further, the Monetary Board is of the view that with the proposed Debt Exchange and the other reforms being implemented by the Government, the sustainability of public finance will be restored with its ability to service its debt. The Monetary Board was also cognizant that unless debt sustainability is restored without undue delay, there is a high risk of the Government not being in a position to fully service the obligations on the pre-exchange bonds held by the EPF leading to very serious adverse consequences to the EPF.”
“Hence, opting for the DDO was in the best interest of the members of EPF based on the two options available, given that a large share of EPF’s assets is invested in Treasury bonds. It is also important to note that after the participation in DDO current balances of EPF members will not be reduced and the Fund will be able to distribute at minimum 9% per annum return to members in foreseeable future.” (Colombo/September 14/2023)
You have to educate. the members of EPF more about this without technical jargon with simple Arithmetical example