8 May 2023 01:30 am Views - 288
The largest superannuation fund in the country, the Employees’ Provident Fund’s (EPF) heavier tilt towards the government securities (G-Secs) in its investment allocations has suddenly exposed it to a possible domestic debt treatment.
Meanwhile, its returns, which have stubbornly stuck around 9.0 percent level for years, have caused its millions of members to receive only a nominal return despite the red hot inflation in the economy.
According to the data published by the Central Bank roughly a fortnight ago in its latest annual report, the EPF has not been able to exceed an annual return of 9.50 percent in the last few years and it has stuck at 9.0 percent from 2020 through 2022. Sri Lanka’s inflation peaked around 70 percent last year.
This is despite the government securities yields rising through the roof in 2022 in response to sharp policy tightening.
The Fund’s investment portfolio was at Rs.3,466.5 billion by the end of 2022 and 96.9 percent was invested in government securities. Only 2.3 percent was in equities, 0.7 percent in corporate debt and the balance 0.1 percent is in reverse repurchase agreements.
This disproportionate allocation towards G-Secs has not just caused the fund to return only a nominal interest to its members, it has also been exposed to the risk of possible domestic debt optimisation, which was announced by the authorities a few weeks ago.
“The size of the Fund compared to the size of the Sri Lankan capital and financial market, provided limited investment opportunities, making EPF to commit its investments mostly towards government securities”, the Central Bank annual
report said.
“Such high dependence on sovereign has created some risk to the EPF in an environment of possible domestic debt optimisation,” it added.
Sri Lankan authorities have called for voluntary debt optimisation for bond holders, while offering to restructure the bills held by the Central Bank, leaving out the bills held by rest of the financial sector participants.
But banks have balked even at the prospects of voluntary bond restructuring.
They said they had been through enough in terms of hit to their capital from the provisions made against dollar bonds they hold and the rising non-performing loans.
The International Monetary Fund (IMF) last week assured its support to any domestic debt restructuring which safeguard the financial sector stability.
The total assets of the EPF was at Rs.3,459.9 billion by the end of 2022, up 293.7 billion during the year or by 9.3 percent, which was contributed by the combined effects of net contributions of the members and the income generated from the investments of the fund.
The Fund represents 20.4 million member accounts with 2.4 million active
member accounts.