ECONOMYNEXT – Sri Lanka is planning to discontinue a senior citizen interest subsidy schemes after abuse, after massive cost overruns and hidden arrears were discovered, especially in the run up to a sovereign default, International Monetary Fund program documents show.
Sri Lanka was now looking for others ways to be better give benefits to the most in need of help and making sure that the existing scheme was not mis-used.
“Reforms to the new senior citizen subsidy scheme are required to limit fiscal costs,” an IMF analysis said.
“A previous version of the scheme was a key source of cost overruns and arrears.
“Authorities will institute an identity verification scheme for the new interest subsidy scheme to limit the potential for abuse including through beneficiaries with multiple accounts receiving multiple payments.”
Sri Lanka started giving subsidies to senior citizen deposits after interest rates fell with lower inflation after the 2009 and 2012 currency crises, before rate cuts and open market operations to target the call money rate triggered new crises and high rates in the stabilization crises.
As rates rocket up in the stabilization crisis, after rate cuts, the interest subsidies are usually discontinued.
Initially private banks voluntarily gave higher rates to senior citizens, but the government later started giving subsidies.
There were also distortions in the market, with subsidies initially given through state banks, leading deposit shifts in the system, analysts say. A large run on deposits for example can lead to the collapse of a bank.
After 2015 interest subsidies had ratcheted up, according to Finance Ministry data. At the time the senior citizen subsidy scheme (which paid around 12-pct) was hiked to 15 percent under the Yahapalana regime.
In 2015 in particular the central bank printed large volumes of money to target a mid-corridor call money rate, keeping interest rates artificially low, triggering a currency crisis and a new IMF program.
Interest rates were kept down in part with heavy foreign borrowings through sovereign bond and syndicated loans, as forex shortages came from rate cuts enforced with open market operations (flexible inflation targeting), making it difficult to settle maturing instalments of foreign loans, analysts have pointed out.
The interest subsidy which was 3.6 billion rupees in 2015 then went up to 13.4 billion in 2017 and 18.0 billion in 2019.
In 2020, the central bank again started to print money to target potential output (after earlier stabilization crises coming after rate cuts killed growth) with authorities saying there a ‘persistent’ output gap.
In 2020, when large volumes of money was printed by macroeconomists including by ordering ceilings on Treasury bill auctions, the senior citizen interest soared to 31.1 billion rupees.
As the call money rate was targeted in 2022, senior citizen bill had doubled to 63.95 billion rupees.
Meanwhile arrears were building up. The auditor general also started raising red flags.
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In 2023 as interest rates rocketed in the latest stabilization crises that comes after flexible inflation targeting rate cuts, the scheme was discontinued.
By then 184.6 billion rupees had been spent and only 55.72 billion rupees had been paid with 47.3 billion being settled in 2022. It is not clear whether they were settled with printed money.
In any case 128.64 billion were not settled by end 2024, as per the Finance Ministry annual report.
Last month central bank again cut rates to target the call money rate, under ‘flexible’ inflation targeting, (not by printing money but by so-called signalling) just as bank deposit rates were starting to move up amid credit demand.
The government then announced a new interest subsidy scheme for senior citizen, reviving the Rajapaksa-Yahapalana era practice.
The IMF said 138 billion rupee arrears bombshell had been discovered after the Finance Ministry disclosure to the public in greater transparency, which had not been reported to the IMF as required due to series of mis-understandings but not deliberately.
The IMF had also released loan tranches thinking a QPC on eliminating arrears had been met but has since given waivers.
“We will manage misuse and arrears risks from the senior citizens’ interest subsidy
scheme approved in 2025,” Sri Lanka authorities said.
“We will institute an appropriate identity verification system to prevent beneficiaries receiving multiple subsidy payments and thus reduce the potential for misuse under the program.
“We will not exceed the 2025 budget appropriation for this scheme. We will ensure
timely refunds to licensed banks of valid subsidy payments to avoid incurring arrears.
“We will discontinue the current scheme for deposits placed after December 31st, 2025 and in the future, we will focus on measures that are well targeted and less distortive to support the poor and vulnerable.”
Sri Lanka had previously sought waivers for underspending subsidies under the IMF program. It is not clear whether the interest subsidy was included in the subsidy total (about 200 billion rupees).
The spending however was a floor, not a ceiling. Sri Lanka has been an unusual tax collecting drive called revenue based fiscal consolidation (tax and spend) where there is no focus on containing costs (spending based consolidation), up to now. (Colombo/July06/2025)
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