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Home Business & Finance Economic Policies

Sri Lanka faces debt woes, food price volatility as trade war escalates: UN report todayheadline

April 19, 2025
in Economic Policies
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ECONOMYNEXT – Sri Lanka’s Employees Provident Fund of private sector workers, managed by the central bank has paid the highest real return in many years as the central bank missed its inflation target amid East Asian style monetary policy.

The EPF has declared interest on member balances of 11 percent in 2024, after declaring 13 percent in 2023.

Though inflation measured by the Colombo Consumer Price Index was 4 percent last year it was a negative 1.7 percent in 2024, as the rupee was appreciated for two years in a row by the central bank itself, which operated deflationary policy.

The central bank has got itself an inflation target of 5 percent a year, which can go up to 7 percent, triggering currency crisis in the process as inflationary open market operations trigger forex shortages.

However, since September 2022 the central bank has run broadly deflationary policy (except for the last quarter of 2024), and also allowed the rupee to appreciate from 363 in 2022, to below 300 by the end of 2024.

As prices fell in 2024, also helped by better US monetary policy which was bringing down global commodity prices, the ‘real’ return hit 12.7 percent in 2024, up from 9 percent in 2023, when the EFP declared a 13 percent interest on member balances.

This is the first time in recent history that the EPF has declared double digit real returns.

Though EPF securities were restructured to meet International Monetary Fund requirements aimed at reducing debt roll-over risks (gross financing needs), the central bank has both boosted nominal real returns and also appreciated the real value of the underlying balance before annual earnings.

According to classical theory, interest is a function of capital (not reserve money manipulation, which is is simply a liability of a bank of issue) and low or no inflation and capital preservation leads to falling nominal interest due to sound money.

This will lead to lower fixed income returns. The bulk of EPF funds are invested in government securities. However it also has a share portfolio.

Before macro-economists started open market operations in 1923, and almost up to the 1960, nominal and real interest rates were the same. (Colombo/Apr20/2025)


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Tags: debtescalatesfacesfoodLankaPricereportSritodayheadlinetradevolatilitywarWoes
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