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Rs 12Tn loss to EPF is a misrepresentation of opportunity loss: CB Governor

Sri Lanka’s Central Bank chief on Thursday disputed the claim that the Employees’ Provident Fund (EPF) would lose a staggering 12 trillion rupees (USD39 billion) by 2038.

The EPF would suffer a loss of Rs 12 trillion, Opposition Leader Sajith Premadasa told Parliament yesterday. He said that an independent think tank had assessed that even based on the prevailing average interest rate, conservatively calculated as 13 percent, the EPF would lose 12 trillion rupees by 2038.

“That calculation completely misrepresents the reality. That’s the first thing I want to mention. The yield for EPF should be around 11 percent, not 13 percent. Even if we think that percentage is correct, we need to consider taxes otherwise we are comparing Apples with Oranges,” Central Bank Governor Nandalal Weerasinghe emphasized.

“Where would be the inflation if we are to give a 13 percent yield over a period of 15 years? Inflation needs to be around 15 to 18 percent until 2038. If you discount taking into account that assumption we can inflate this even to a 100 trillion. But the problem here is that, if we are to give a 13 percent yield until 2038, that means our debt will not be sustainable. If we assume that scenario we may have to restructure our debt again in a few years.”

The government has guaranteed an interest rate of 12 percent for these funds until 2025, followed by a guaranteed interest rate of 9 percent until the maturity date.

Some analysts argue that the expected interest income might not be attained even though the current trend indicates a significant decrease in market interest rates.

“Yes, there is an opportunity loss to the EPF. According to our calculations, it is 9.4 percent long-term interest on average but it will be reduced to 9.1 percent,” he said.

“According to our calculations, the opportunity loss is 4 percent but if we raise the taxes on the EPF, the opportunity loss would go to 21 percent.”

The EPF is currently doing an analysis by looking at the bond yields to recommend to the monetary board of the Central Bank their decision.

“This is how it has been formulated. In the first two years, the interest rate is high because in the first two years, there could be a benefit to the fund and that could be gradually smoothed over the next several years,” he said.

“Step-down coupon means, in the first two years it is higher than the average yield of the EPF portfolio. So, that will give us a boost for the first few years, and the opportunity loss comes later.”

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