• Highlights proposed DDO’s limited scope in addressing fragile state of country’s budgetary situation
• “Given scaled-down revenue, current optimisation targeting only Central Bank and superannuation funds may not be sufficient in my view”- Dr. W.A. Wijewardena
• Says proposed DDO will ultimately burden general taxpayer and members of pension funds in particular, with a big blow to low-income earners
• Points out some proposals in DDO plan are in violation of voluntary element announced by authorities in March

Given the anticipated shortfall in state revenue from the targeted levels, a former Central Banker casted doubts on the narrow scope in the proposed Domestic Debt Optimisation (DDO) strategy providing sufficient leeway for the government to get the fragile budgetary situation under control, while raising concerns on the disproportionate impact on the low-income earners.

“Given the scaled-down revenue, the current optimisation targeting only the Central Bank and superannuation funds may not be sufficient in my view,” senior economist and former Central Bank Deputy Governor Dr. W.A. Wijewardena told Mirror Business. The DDO approved by the Cabinet of Ministers this week proposes to put the burden on the Central Bank, in the case of Treasury bills and superannuation funds, in the case of Treasury bonds, leaving the country’s banking sector out of the process.

Although the original revenue for this year is estimated at Rs.3.4 trillion in the 2023 budget, it was downscaled to Rs.3.2 trillion when the International Monetary Fund considered the Extended Fund Facility for Sri Lanka in March this year.  

Dr. Wijewardena noted that the government is most likely to end up with 75 percent of the revised estimated revenue of Rs.3.2 trillion at Rs.2.4 trillion by the end of this year.

With gross expenditure rising to Rs.14 trillion this year, he highlighted that the gross financing requirement for this year has reached Rs.10.8 trillion or equivalent to 36 percent of GDP.

“To push it down, it is necessary to curtail the gross expenditure by postponing the repayment schedule and interest component included in the current expenditure of the government. 

The present domestic debt optimisation is in line with this requirement. The DDO is not a choice but an inevitable course of action by the government, given the fragile budgetary situation in Sri Lanka,” he elaborated. 

He opined that the proposed DDO would ultimately burden the general taxpayers and members of the pension funds in particular, with a big blow to the low-income earners. 

Although the government appears to be benefiting by restructuring the Central Bank’s Rs.3 trillion debt instrument portfolios made up of Rs.2.7 trillion worth Treasury bill holding and Rs.300 billion in provisional advances, Dr. Wijewardena pointed out that when examined deeply, the burden would eventually fall on the taxpayers, given the current financial status of the Central Bank.

“When the Central Bank’s portfolio of about Rs.3 trillion is converted to a bond of five to 15 years, at a lower interest rate, the government will benefit but given the current loss-making situation of the Bank, there will be a depletion of the capital funds, which the governor has already admitted and which needs be supplied by the government. That cost will be passed on to the general taxpayer,” he remarked.

In terms of Treasury bonds, the superannuation funds would have to take a hit by way of a reduced interest flow at about 09-12 percent from the current 20-22 percent range. If the members are not willing to accept the interest rate reduction voluntarily, it has been proposed to increase the current tax on gross revenue from 14 percent to 30 percent.

Dr.Wijewarden apointed out that this proposal is in violation of the so-called voluntary element in the announced in the initial optimization plan by the authorities in March. Ultimately, he highlighted that the burden would disproportionately fall on the low-income earners in the country.

“It has been suggested that the current tax on superannuation funds at 14 percent of the gross revenue(note it is gross revenue and not on the net revenue as in the case of other corporate bodies) should be increased to 30 percent of gross revenue, which will kill the funds in the long run. It also violates the voluntary element that has been announced in the optimization programme. A 30 percent tax on the gross revenue is an anomaly since the other financial institutions are paying 30 percent on the net revenue. Since the superannuation funds net revenue is zero due to the full appropriation of the revenue to pay interest on the member balances, the rate in real returns will be infinite. However, it is the low-income people who are to bear the burden,” he elaborated.

Commenting on the impact on licensed commercial banks, Dr.Wijewardena remarked that the burden on commercial banks with respect to SLDBs and ISBs would be minimal and banks are well-positioned to safely absorb this burden without passing it on to depositors. 

The licensed commercial banks which hold around 36 percent of the outstanding Treasury bond stock is excluded from the proposed DDO amid concerns on impact to the stability of the financial sector stability. The proposed DDO strategy is scheduled to be debated in Parliament over this weekend once it is cleared by the Committee on Public Finance (COPF).