Friday, 7 July 2023 00:00 –      – 77

Central Bank Governor Dr. Nandalal Weerasinghe flanked by senior officials gestures during the post Monetary Policy review media briefing yesterday

– Pic Pardeep Pathiranara


 

  • Maintains still no need for DDR given natural hair cut following high inflation but decided on it as compromise in interest of ensuring breakthrough in negotiations with external creditors and restore long-term debt sustainability
  • Justifies excluding private bond holders and primary dealers from DDR treatment as they account for only 0.1% and 0.9% respectively of total T-Bond stock and they are subject to higher taxation
  • Opines assessment of Rs. 12 t loss to EPF as wrong, misleading, and a misrepresentation of facts, figures and reality
  • Says since EPF holds T-Bonds until maturity, net present value doesn’t arise
  • Claims EPF would face a bigger damage if not included in DDO treatment
  • Preliminary projections point to opportunity loss of 4% for EPF if it takes up DDO treatment and 14% if it opts out and starts paying higher tax
  • EPF is currently engaged in analysing proper impact

By Nisthar Cassim

The Central Bank yesterday allayed unfounded fears and debunked doomsayers over the Domestic Debt Optimisation (DDO) insisting it did what is best for Sri Lanka considering multiple factors and eyeing the broader goals of the country.

Amidst criticism from the Opposition and some analysts, the Central Bank defended the DDO framework saying it was “most fair and reasonable” and the best option carved out after considering multiple factors.

“Benefiting all stakeholders from a broader sense, the DDO framework is the best deal with which we can move forward,” CBSL Governor Dr. Nandalal Weerasinghe told journalists yesterday. He said it has been positively received by the markets as well as internationally.

”We as the Central Bank have responsibility for financial system stability. Our position has always been because of the high inflation rate our domestic debt has already been effectively restructured to a certain extent. Our position at that time obviously was that we do not see a need for a further restructuring and even today I maintain the same position,” CBSL Governor said.

“But what made us change the position as a compromise is in the interest of achieving a breakthrough in negotiations with external creditors and concluding the overall sovereign debt restructuring process. When we agree to certain next ten year debt targets then when we ask our external creators to make a contribution and on that basis based on the debt targets,” he explained.

It was pointed out that progress made in terms of higher taxation and achieving a positive primary balance wasn’t sufficient for external creditors to consider relief for Sri Lanka.

The Governor indicated that through the DDO, Sri Lanka has sent a strong message to external creditors to make significant contributions to the country’s overall debt sustainability as well.

“External creditors would like to see a little more contribution domestically compared to what they are going to give us. So, this is a process of negotiations. In that negotiation obviously there are two choices. Either you can hold on to a position where you do nothing and expect the other party to suggest,” Weerasinghe said. He dismissed the Opposition demand that Sri Lanka should ask external creditors for a 50% haircut.

“But our interest in that negotiation is to while understanding there has to be a compromise, there has to be a domestic contribution how best we can optimise the contribution while protecting the interest of the central bank in terms of, as I said, securing financial stability minimising impact comes into a balance sheet,” CBSL Chief added.

Referring to Verite Research assumption that DDO will result in Rs. 12 trillion impact to the Employees Provident Fund (EPF), the CBSL Governor alleged it was wrong, misleading, and a misrepresentation of facts, figures and reality.

He emphasised that since EPF holds T-Bonds until maturity, the net present value doesn’t arise. He also claimed that EPF would face a bigger damage if not included in DDO treatment.

“Preliminary projections point to opportunity loss of 4% for EPF if it takes up DDO treatment and 14% if it opts out and starts paying higher tax,” Dr. Weerasinghe said, though adding that the EPF is currently engaged in analysing proper impact.

Justifying the exclusion of private bondholders and primary dealers from DDR treatment, Weerasinghe said they account for only 0.1% and 0.9% respectively of total T-Bond stock  and they are subject to higher taxation.

 

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