Daytime robbery called DDO!

Last Friday, the organisers of ‘UNITE’ convened a meeting of all the oppositional parties, trade unions, and civil society organisations at the Public Library in Colombo. UNITE is an umbrella organisation comprising some leading trade union organisations like Ceylon Bank Employees Union, United Federation of Labor, Ceylon Teachers Union, FTZ unions, Postal Union, and other several leading trade unions, and the collective of multiple social movements.

At the outset, Jagath Gurusinghe, General Secretary of the UFL explained briefly but eloquently the principal focus of the meeting. He informed the gathering that the meeting was just one more step in the ongoing protest and agitation against the Ranil-Rajapaksea government and its proposal for domestic debt restructuring. The steps that have been already taken were lucidly explained. The focus of the meeting is three-fold. 1. A brief critical analysis of the CBSL proposals and their implications to the working people (awareness building); 2. The work done so far to counter and stop the implementation of DDO (auditing the past work); 3. Prepare a joint action plan that includes all the oppositional political parties, groups, and social movements (the front formation). As Jagath Gurusinghe of the Telecom Union has informed the campaign against the government’s DDO proposals by the united action front has been tentatively fixed for August 28.

Revisiting CBSL proposal to the Parliament 

Based on many an analysis of DDO, this article is focused on a different dimension, Here the methodology that has been adopted is a simple calculation based on available and projected data. The release of the annual report of the Employees Provident Fund (EPF) is unusually and invariably delayed so we have to base ourselves on two to three-year-old data. Secondly, our analysis is on the general EPF and not on specific sectors or company-run superannuation funds. Notwithstanding the fact that the devaluation of the principle fund may be attributed to price inflation, the negative influence brought down by it is bracketed in the context of this article. Nonetheless, it is important to note that the adverse impact of inflation is substantial and continuous.

The current value of the EPF is Rs. 3,460 billion, making it the most lucrative single capital resource in Sri Lanka. The fund has been growing annually. Its main injections and withdrawals are plotted in Figure 1: Domestic Debt Restructuring ex-ante.

The main injections to the pool of resources have been two-fold. They are 1. Monthly contributions of the members of the fund that comprises private, corporate, and state-owned enterprises; and 2. Annual earnings of the fund come from myriad forms of fund investment. Figure 1 shows that while the first amounted in 2022 to Rs 193 billion, the second was to Rs. 285 billion. Both totaling Rs. 478 billion. Let me now turn to annual withdrawals from the pool that are also two-fold, namely, 1.

Total annual payments to the members of the EPF when they are retired; and 2. Tax payments to the government now stand at 14 percent. Hence, the total withdrawals are Rs 211 billion (Rs. 163 plus Rs 48 billion). It is interesting to note that the EPF tax payments are calculated as Dr. W. A. Wijewardana has shown in his excellent article on the subject of gross income not and not net income (Gross Income – Interest Payments). Balancing total injections with total withdrawals, it is not difficult to calculate the annual net receipts to the resource pool that amounted to Rs 267 billion (say in 2002) which we call the total annual net returns of the pool. What does it mean? EPF account holders’ social security savings increased on average by 7.71% approximately. That amount may vary with the rate and the amount of earnings, tax rate assuming membership of the EPF remains unchanged. (See Figure 2)

Now comes the so-called debt restructuring. The objective of the debt restructuring is to reduce the total government financial needs (hereafter GFN) from the current 34.5 percent of the GDP to an annual average of 13 percent of GDP between 2027- 2032. The Governor of the Central Bank says the government has already adopted stringent measures that are economically and socially costly in order to reduce it. These measures include revenue-enhancing measures and expenditure rationalisewasation. Moreover, many more taxes would come in the near future. What are the perimeter and parameters of domestic debt restructuring? What has the Ranil- Rajapakss government proposed?

The Impact of DDR on Superannuation Funds

To make the argument as simple and less complicated as possible, as indicated above, some assumptions are made. For example, it has been assumed that the ratios between the total value of the EPF and its constituent elements remain unchanged. The proposals say that the superannuation funds will not face a haircut. However, they include exchanging its funds for long-term bonds, interest reduction after 2025 to 9 percent, and an increase of tax rate from 14 percent to 30 percent for some superannuation funds. According to the CBSL calculation, a reduction of GFN by 0.05 percent of the GDP is projected. In simple language, as Figure 2 shows, this means that Rs. 113 billion would be involuntarily taken away from the EPF to DDR. As a result, the total withdrawals from the fund increased from Rs. 211 billion to Rs. 324 billion. Having assumed that other factors remain unchanged, the net annual receipts to the resource pool would be in the vicinity of Rs. 154 billion. A significant reduction from Rs. 267 billion prior to the DDR. Hence, the net annual rate of return would be lowered to 4.45 percent.

In the absence of the DDR, the total value of the fund at a net return of 7.71% will increase to Rs 9,396.74 billion in 2035. With the domestic debt restructuring the total value of the EPF would increase only to Rs 6,124.81 billion in 2035. Rs. 3,271.93 will be robbed from the EPF in the coming years. This is approximately a 34.8 percent capital loss.

 

 

by Sumanasiri Liyanage 

The writer is a former teacher in political economy.

E-mail: sumane_l@yahoo.com

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