ECONOMYNEXT – Sri Lanka’s Staff Provident Fund of personal sector staff, managed by the central financial institution has paid the best actual return in a few years because the central financial institution missed its inflation goal amid East Asian fashion financial coverage.
The EPF has declared curiosity on member balances of 11 p.c in 2024, after declaring 13 p.c in 2023.
Although inflation measured by the Colombo Shopper Worth Index was 4 p.c final yr it was a adverse 1.7 p.c in 2024, because the rupee was appreciated for 2 years in a row by the central financial institution itself, which operated deflationary coverage.
The central financial institution has bought itself an inflation goal of 5 p.c a yr, which might go as much as 7 p.c, triggering foreign money disaster within the course of as inflationary open market operations set off foreign exchange shortages.
Nevertheless, since September 2022 the central financial institution has run broadly deflationary coverage (apart from the final quarter of 2024), and in addition allowed the rupee to understand from 363 in 2022, to under 300 by the tip of 2024.
As costs fell in 2024, additionally helped by higher US financial coverage which was bringing down world commodity costs, the ‘actual’ return hit 12.7 p.c in 2024, up from 9 p.c in 2023, when the EFP declared a 13 p.c curiosity on member balances.
That is the primary time in current historical past that the EPF has declared double digit actual returns.
Although EPF securities have been restructured to fulfill Worldwide Financial Fund necessities aimed toward decreasing debt roll-over dangers (gross financing wants), the central financial institution has each boosted nominal actual returns and in addition appreciated the actual worth of the underlying steadiness earlier than annual earnings.
In keeping with classical concept, curiosity is a operate of capital (not reserve cash manipulation, which is is solely a legal responsibility of a financial institution of situation) and low or no inflation and capital preservation results in falling nominal curiosity as a result of sound cash.
This may result in decrease fastened revenue returns. The majority of EPF funds are invested in authorities securities. Nevertheless it additionally has a share portfolio.
Earlier than macro-economists began open market operations in 1923, and nearly as much as the 1960, nominal and actual rates of interest have been the identical. (Colombo/Apr20/2025)
