Introduction
In a recent development, the Central Bank of Sri Lanka (CBSL) has made an important announcement regarding the country’s largest pension scheme, the Employees Provident Fund (EPF). To ensure the best interest of EPF members, the CBSL has chosen the government’s domestic debt optimization (DDO) option with a long-term perspective. Let’s take a closer look at the details.
The Options: Exchange or Non-Exchange
The EPF was presented with two options under the parliament-approved DDO: the exchange option and the non-exchange option. After careful analysis by the central bank, it was revealed that if the DDO option is not chosen within the next 12 years, the EPF’s return could drop to as low as 6.79 percent, while opting for DDO could result in a return of 8.02 percent.
Under the exchange option, the EPF can exchange a specific amount of existing Treasury bonds with 12 new Treasury bond series. These new bonds have varying maturity dates from 2027 to 2038, with a coupon rate of 12 percent per annum until 2026, and 9 percent thereafter. Additionally, the EPF will continue to pay income tax at a rate of 14 percent per annum on its taxable income from its Treasury bond portfolio.
On the other hand, the non-exchange option involves the existing Treasury bonds being subjected to a 30 percent tax rate on the taxable income of the Treasury bond portfolio.
The Decision and its Benefits
After thoroughly considering the available options, the Monetary Board of the CBSL, acting as the custodian of the EPF, decided to opt for the Debt Exchange offer. This decision is based on a long-term perspective, keeping the best interest of the EPF members in mind. The EPF has tendered 2,667.5 billion face value of Treasury bonds for debt exchange, surpassing the minimum participation requirement. In recognition of its favorable impact on the Fund, the government has accepted the EPF’s request and issued new Treasury Bonds with an equivalent face value.
Government Approval and Legal Matters
President Ranil Wickremesunghe’s government obtained parliamentary approval for the DDO earlier in July. However, its implementation faced a delay due to challenges in amending the Inland Revenue Act alongside the DDO. Opposition and activists filed fundamental rights cases, causing further obstacles. Fortunately, the Supreme Court cleared the legal barriers earlier this month, enabling the progress of this initiative.
Expert Analysis and Restoring Debt Sustainability
The CBSL assures that the decision to opt for Debt Exchange was made after careful analysis by experts. Considering several prudent and realistic assumptions, the Monetary Board determined that Debt Exchange is the superior option. It believes that with the proposed Debt Exchange and other government reforms, the sustainability of public finance will be restored, improving the government’s ability to meet its debt obligations. The Monetary Board also acknowledged the high risk of the government being unable to fully service the obligations on the pre-exchange bonds held by the EPF, which would have serious adverse consequences for the fund.
Conclusion: A Favorable Choice for EPF Members
In conclusion, the decision to opt for the DDO option was made in the best interest of the EPF members. Given that a significant portion of the EPF’s assets is invested in Treasury bonds, this choice ensures that current balances of EPF members will not be reduced. Moreover, the EPF will be able to distribute a minimum annual return of 9 percent to its members in the foreseeable future.
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