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Sri Lanka's unfunded public service pension liabilities could add around 25% to national debt,Verite Research Head Dr Nishan de Mel said.
He made this remark addressing a seminar organized by the Asia Securities under the theme "Banks: An evolving story of Elephants and Cheetahs" in Colombo.
While we are talking about having a 75 per cent to 80 per cent debt to GDP ratio,we have an invisible debt of about 15 to 25 percent of debt in actual fact."It is a liability accrued against future taxes and we are paying it. But because it is hidden from the books it does not come into macro-economic analysis, Mel said.
The pension service for civil servants in Sri Lanka covers about 90% of the last wage of civil servants. However it is not explicitly indexed to inflation. It can deteriorate quickly. But the politics of increasing the number of pensioners means that the government has to constantly adjust that pension payment upwards.
Because state worker pensions are not funded, the liability is not readily visible but annual pension payouts have risen from about 50 billion in 2005 to 130 billion by 2014. The pension payouts have varied from 1.25 percent to 2.0 percent of GDP.
"The advantage of offering higher levels of pensions is that the politician who offers higher levels of pensions does not have to put money where his mouth is. If you looked at budgets in Sri Lanka in the last four five years, you notice that budgets are full of new pension schemes. Pensions schemes to farmers, to fishermen, recently pension schemes to trishaw drivers. So we are proliferating unfunded pension schemes because we do not have to put the money upfront." Mel said.
Sri Lanka has about 8.4 million in the labour force; of which 15% of them are in the government service. About 50% of Sri Lanka's labour force is above 40 years.The policies the government makes with regard to pensioners and hiring can significantly impact the pension commitments of the government at the end.
According to Mel, the public sector is still seen as a preferred place for employment as well as a source of dignity in Sri Lanka.Reforming the public sector and managing the exchange rate is a politically sensitive issue in Sri Lanka.
Mel also added that the import substitution policy is also a politically sensitive issue in Sri Lanka. Moving to an export promotion framework without paying the due attention to local manufacturer is going to be a tough challenge.
