Sri Lanka completed its Domestic Debt Optimisation (DDO) last week after a delay of two months, as 37% of the Government’s Treasury bonds portfolio was subjected to the restructuring, with 84% of Treasury bonds held by superannuation funds, including the Employees’ Provident Fund (EPF), participating in the DDO.
Although in recent weeks opposition against subjecting the EPF to restructuring came primarily from trade unions while political parties did not raise many concerns, has the Government done its best in centring its strategy on superannuation funds?
The main concern regarding the EPF is about providing a 9% return as guaranteed by the Government, since under the DDO, Treasury bonds will have a step-down coupon rate of 12% until 2025 and 9% thereafter until 2038.
The returns paid to EPF members are considered as a dividend payment, where the profit is shared with owners of the fund and not as mere interest payments after reducing expenses. However, with the 14% tax on the remaining interest income minus expenses, can the Government afford a 9% return?
On the other hand, no party has been able to present an alternative to the DDO than what the Government has chosen, since including the banks would have a much higher risk and the portion held by primary dealers and insurance funds is not considerable.
Did TUs propose alternatives to the CBSL?
Speaking to The Sunday Morning, Samagi Jana Balawegaya (SJB) Trade Union (TU) arm Samagi Trade Union Collective Convenor Ananda Palitha, who also participated in the meeting with the Central Bank of Sri Lanka (CBSL) Governor, claimed that the benefit of the investments done through the EPF was not enjoyed by its members and instead, the income had been used to invest in several bankrupt projects and institutions.
“The EPF has already lost billions through those investments. Sri Lanka’s bankruptcy is not the fault of workers. Therefore, we are against taking the money owned by the workers,” he said.
He said that they had proposed several options to the Governor, such as slashing the massive interest rates on fixed deposits in banks and on Treasury bonds belonging to large-scale businessmen who had defaulted on taxes while enjoying high interest payments.
Moreover, he said that the Rs. 904 billion in evaded taxes owed to the Inland Revenue Department should be recovered, pointing out that its current value exceeded Rs. 2 trillion.
Further, he charged that the Government should recover the Rs. 54 billion which had been written off as Non-Performing Loans (NPLs) by the People’s Bank through loans given to corrupt and tax-evading large-scale businesses by overestimating their assets, as revealed by the Committee on Public Enterprises (COPE).
Palitha also pointed out that it had been revealed at the Committee on Public Finance (COPF) meeting that the Government could not guarantee a 9% return for members after a period of four years, which he termed as a huge concern.
He added that the CBSL Governor, at the meeting held with the trade union collective, had said that there would be a 0.5% opportunity loss for the EPF from the DDO, although it had been revealed at the COPF meeting that this loss would be 4%.
At the COPF meeting held on 7 September, Central Bank Governor Dr. Nandalal Weerasinghe said that EPF would be subjected to an opportunity loss of 4% by 2038 by accepting the DDO, while an opportunity loss of 21% would be incurred by accepting the 30% tax after avoiding the DDO.
“The Government will not be able to pay a 9% return, because even without any reduction, when the Government was paying 14-20% on Treasury bonds, it paid an interest of 9% to EPF members. Of that, 2.5% went towards administrative expenses, so only 7.5% was paid to individual members thus far,” Palitha elaborated.
TU proposals not practical
Speaking at an event held by the University of Kelaniya, CBSL Governor Weerasinghe said that if the Government were to lose the ability to service its debt, the EPF would be the first to face an impact as the investments of the EPF and its benefits would be slashed, resulting in the loss of funds.
Commenting on the selection of a superannuation fund for the DDO while excluding others, he said that even the Supreme Court determination on the matter had noted that it was a fair decision, as other parties such as banks and professionals were already paying a higher percentage of taxes to the Government.
“Criticism is still being raised about the way in which the domestic debt is being restructured,” he said.
He noted that a group claiming to represent some trade unions had made repeated requests for a meeting with the Central Bank, to which the bank had responded by arranging a meeting, with the intention of having discussions on a professional level.
“However, they did not have even a 1% representation in the EPF. They bore the intentions of the political parties they belonged to,” he added.
Moreover, he said that the meeting had not turned out to be a professional discussion, with officials of the Central Bank not being allowed to express their views and opinions and being interrupted by the trade union collective, which had made statements irrelevant to the discussion.
“The various views and opinions presented by them were not relevant nor practical and they cannot be implemented,” the Governor said, adding that the proposal to recover Rs. 904 billion in evaded taxes could take a long time as it would include changing laws and spending time in courts.
“This will not provide a solution to the debt problem, since the Government’s ability to service its debts is at a very critical stage,” Weerasinghe said.
EPF administration trusts Monetary Board’s decision
Moreover, speaking to The Sunday Morning, EPF Superintendent A.G.U. Thilakaratne said that certain evaluations had been presented to the Monetary Board by independent parties, along with the analysis presented by the EPF, which had been used to make the final decision on participation in the DDO.
“I think the Monetary Board chose the best option,” he said.
He noted that the Monetary Board would be releasing a statement in the coming week on the rationale behind the EPF accepting the DDO. He also said that he was unaware of the basis of the Central Bank Governor’s claim about the 4% opportunity loss for the EPF when opting for the DDO against the 21% when avoiding the DDO.
Thilakaratne observed that the Governor could have made such a statement based on the Central Bank’s own calculations or an analysis provided by an independent party. “We have presented our own analysis on the DDO to the Monetary Board based on its request,” he said. However, he noted that they had not provided an in-depth calculation-based analysis but had simply provided what the Monetary Board had requested.
Is a 9% return guaranteed for EPF members?
Addressing the possibility of members receiving a return of 9%, Thilakaratne said that this would not be an issue as the EPF had other forms of income, such as interest income of the Treasury bill portfolio and the invested stocks at the Colombo Stock Exchange (CSE).
However, at the COPF meeting, the CBSL Governor said that based on their calculations, a 9% return could be guaranteed for a maximum of four years from the point of the debt exchange. He said that the Government was planning to amend the EPF Act, to ensure that if a 9% return could not be provided with the available funds, the shortfall would be provided by the Treasury.
“There is a guarantee that EPF members can be paid a minimum return of 9% for the next four years,” he said.
However, he said that after four years, as the share of the debt exchange portfolio reduced, the return would depend on the new portfolio that would be included in the fund based on the market rates at the time.
Speaking at the COPF meeting, Deputy Treasury Secretary A.K. Seneviratne said that superannuation funds that qualified for the DDO would forever be subjected to a 14% tax on the interest income of the Treasury bonds, while superannuation funds that did not qualify would forever be subjected to a 30% tax rate on interest income.
No detailed analysis from COPF
Speaking to The Sunday Morning, COPF Chairman and SJB MP Dr. Harsha de Silva said that the committee had not been able to undertake a detailed analysis on the impact of the DDO on the EPF due to the Government not providing data in a timely manner and a lack of support staff to perform the analysis.
He said that for almost two months, the COPF had been requesting the Government to provide the data in order to undertake an analysis independently of its proposal for the DDO. However, he said that the data had not arrived until just before the COPF meeting last week, during which they had discussed the impacts on the EPF.
“Therefore, we hardly had the time to do the kind of detailed analysis we wished to do and we had to go by the explanation given by the officials at the COPF meeting,” he added.
Moreover, he said that he had undertaken some analysis and that it did not seem to be too contradictory to the numbers given by the CBSL Governor just before the start of the meeting.
“Now that the data is available to us, we plan to do a comprehensive analysis and thereafter point out if there are any discrepancies to what they have given us,” he said.
He said that the CBSL had delayed giving data citing that it was market-sensitive, but noted that the CBSL should have at least given the basic calculations that had been sought, such as the loss to the EPF from the DDO.
“We haven’t been able to independently verify the loss thus far,” de Silva said, adding that the opportunity loss numbers given by the CBSL Governor had to be independently verified by COPF before accepting them.
He also noted that nobody had a complete picture of the impact of the DDO on the EPF. “There is no capacity for the COPF to challenge any of these documents, numbers, or statistics because we don’t have staff. I am all by myself in COPE. At the Committee on Public Accounts (COPA), there is an entire Auditor General’s office to do the analysis, to help, and to support the chairman of the committee. I have to spend hours every day trying to do an analysis on my own,” the COPF Chairman said.
Further, he said that even at the COPF meetings, he could not get into any detail on matters because the Government MPs in the committee kept “jumping at him like a pack of wolves”. “I am stressed out by the time it’s done. It’s as if I am the villain from every side,” he added.
Monetary Board’s rationale
A statement by the Monetary Board said that it had carefully examined how the DDO could affect the fund under the two scenarios presented. To assist the Monetary Board in ascertaining the possible impact of the DDO on the fund, the internal staff of the CBSL had conducted relevant analyses.
It said that such assessments had been carried out on the basis of several prudent and realistic assumptions, taking into consideration the legal, tax, financial, regulatory, accounting, and related aspects of the DDO.
The calculations showed that the tax-adjusted annual return for the Treasury bond portfolio of the EPF would be 8.25% by 2038 with a 14% tax rate on the interest income by 2038, while with a 30% tax rate, it would be reduced to 6.81%.
“At present, the Treasury bond portfolio consists of 88% of the total fund and a larger portion of the remainder is in Treasury bills. The Treasury bills portfolio and new funds can be invested at prevailing market rates so that the total return of the fund portfolio will be higher than the likely returns of the Treasury bonds portfolio under both scenarios,” the Monetary Board said.
Moreover, it said that the Monetary Board was satisfied that, arising from the exchange of Treasury bonds, the EPF would not face liquidity constraints in the foreseeable future and would not result in any reduction to the already-announced current balances in the accounts of members.
Further, it said that the Cabinet had approved an amendment to the Employees’ Provident Fund Act No. 15 of 1958 to present to Parliament the enactment of statutory provisions to guarantee a minimum 9% annual interest from 2023 to 2026 (including the said two years) on the contributions of the members of the EPF.
“The Monetary Board envisaged that 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,” the statement said.
Accordingly, the EPF has tendered Rs. 2.6 trillion face value of Treasury bonds for debt exchange, including an additional Rs. 149.8 billion in excess of the minimum participation requirement considering its comparative benefits to the fund.
The statement said that the Government had accepted the same and issued new Treasury bonds to the EPF with an equivalent face value.