Central Bank deprived of over Rs. 700 billion due to interest rates reduction in DDO..
By: Staff Writer
February 06, Colombo (LNW): Central Bank has deprived of over Rs. 700 billion in revenue due to interest rates reduction in domestic debt optimization process (DDO)
United Republican Front (URF) leader MP Patali Champika Ranawaka said the Central Bank had been denied over Rs. 700 billion due to Treasury bill interest rates reduction and it would be serious in case a financial crisis emerged.
Making remarks at the event to mark Independence Day celebrations by his party, he said the Central Bank reduced interest rates in the process of Domestic Debt Optimization last year.
He said the interest rates for Treasury Bills held by the government were reduced from 25-26 percent to 5-6 percent and the Central Bank lost as much as Rs. 700 billion as a result.
The Central Bank claims DDR is voluntary, where interest rates on existing Treasury Bonds are reduced to 12% until 2025 and further reduced to 9% from 2025 onwards,. eminent economic expert Ahilan Kadirgamar disclosed.
However, retirement funds not participating in a DDR will be subjected to an increased tax rate from 14% to 30% leading to an effective reduction of interest earnings on Treasury Bonds to 7.7% over the sixteen-year period. This strategy is in effect a threat to ensure compliance with DDR.
Sri Lanka’s domestic debt is held by various entities, including the central bank, commercial banks and pension funds. Given that the country’s banking system is already severely weakened, pension funds will almost certainly bear the brunt of the expected adjustment,
This will have a significant impact on the retirement savings of workers who have already been hit by massive price increases.
By reducing the interest rates on sovereign bonds held by Sri Lanka’s largest pension funds from more than 20 per cent to 12 per cent, and then to 9 per cent from 2025 until maturity, the government aims to reduce its interest burden by 0.5 percentage points of GDP annually, he added.
The EPF was established for private and semi-government sector employees and is the largest retirement fund in Sri Lanka, with 19.2 million accounts.
Sri Lanka’s retirement funds hold a total asset value of Rs 4,354 billion. Furthermore, 90% of retirement funds are invested in Treasury Bonds.
The Central Bank claimed that there would be no haircut on retirement funds. However, it plans to reduce the interest earnings of Treasury Bonds held by retirement funds, including the EPF. It intends to reduce the returns of retirement funds each year by 0.5% of GDP in order to reduce the GFN by an equal amount.