Bleak future for savers
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Some of the beneficiaries of the economic crisis in 2022 were senior citizens as interest rates soared and helped them to get a decent return in interest income on their savings. Nowadays, interest rates have sunk and badly affected all savings, in particular senior citizens who don’t have any other income to meet their daily needs, particularly medicine and food.Then, interest rates were high and aimed at reducing overheating the economy. According to a Central Bank statement on August 17, 2022, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank of Sri Lanka were pegged at 14.50 per cent and 15.50 per cent, respectively. These are interest rate guidelines that are followed by banks as benchmark market rates.
In economic parlance, high interest rates are meant to absorb savings in the market in a situation where business activity is to be contained to control inflation, while at the other end of the spectrum, low interest rates are meant to generate economic activity among other developments.
I woke up with these thoughts just as Aldoris, the choon-paan karaya, came down the lane, with his signature tune blaring from the loudspeaker. “Aldoris, oyata ithirikirim thiyenawada (Aldoris, do you have any savings),” asked Kussi Amma Sera. “Ow, eth poliya harima adui nae mae davas (Yes but interest rates are very low these days),” he replied, while handing out ‘hot’ buns. “Eh davas wala apita seeyata vissaka poliyak labuna, eth den poliya seeyata 7-9 kata bahala (At one time we were getting 20 per cent interest and now that has come down to 7-9 per cent),” said Serapina.
“Vishrama giya kattiyata hari amaru athi egolongey viyadam walata muna denna adu poli hinda (Retired persons must be finding it difficult to meet their expenses with such low interest rates),” added Mabel Rasthiyadu.
At a recent meeting with journalists, Central Bank Governor Dr. Nandalal Weerasinghe was asked about falling interest rates and their impact, in particular, on pensioners whose entire savings are in fixed deposits. His reply: “In many countries interest rates are far lower than one experienced in Sri Lanka. We need to live with low interest rates and pensioners should move away from relying on such income.”
While the situation is bleak for savers, mostly senior citizens who traditionally transfer their bulk pension (on retirement from the state sector or their EPF contribution on retirement from the private sector) into fixed income instruments like treasury bills or fixed deposits, the reality is also true that Sri Lanka needs to go with the flow (low interest rates in the world). So how do we protect savers to ensure they get a fair income to meet essential needs?
In a measure of relief, the latest 2025 budget had good news for senior citizens who are now entitled to an additional 3 per cent of interest on their deposits of a maximum of Rs. 1 million with effect from July 1, 2025 for those above 60 years. This means that if you are getting 7-8 per cent interest currently on your deposit, as a senior citizen, you would be entitled to a total of 10-11 per cent interest, with the government subsidising this extra interest to commercial banks. That’s a lot of relief although not to the extent of the 15 per cent interest that senior citizens got some years back.
Interest rates are indeed low in most parts of the world. In Asia it ranges from 0.45 per cent (Cambodia) per annum to 23 per cent (Iran), while in Japan it’s 0.5 per cent and India 6 per cent. In the rest of the world, the lowest is Switzerland 0.25 per cent, while the highest is Russia, Argentina and Turkey where interest rates range from 21 per cent to 46 per cent.
With interest rates at the ‘top of my head’, I was momentarily distracted by the incessant ringing of the home phone. Who was calling this morning? It was Pedris Appo – short for Appuhamy – a retired agriculture expert who does farming.
“I say, my interest income has come down from 20 per cent some years ago to a miniscule 7 per cent. How can we survive,” he asked, adding that they do not have excess funds to invest in the stock market which routinely attracts savers for a better return when interest rates fall.
“This is a perennial problem and the authorities need to find a way to cushion the blow for those entirely dependent on interest income,” I said.
“During the crisis in 2022, when interest rates were high it also helped to meet rising costs of goods with inflation running at 30 per cent +. Even though inflation has come down, the prices remain the same while savers’ earnings have fallen sharply,” he said.
Sri Lanka’s private sector is also feeling the pinch with earnings on fixed income coming down sharply due to lower interest rates.
First Capital Treasuries post-tax profit dropped to Rs. 3 billion for the financial year ending March 31, 2025, a sharp drop from Rs. 11.1 billion recorded in the previous year. The earlier year’s profit was significantly boosted by exceptional gains arising from the sharp decline in interest rates post domestic debt optimisation, the company said in a media release.
Lower interest rates also hurt profits at another company. First Capital Holdings PLC profits. Its income fell to Rs. 5 billion for the year ending March 2025, down from Rs. 10.1 billion in the previous year, largely affected by lower interest rates.
“…….The variance is attributed to the extraordinary gains realised in the previous financial year resulting from a significant decline in interest rates, and post-domestic debt optimisation along with a reduction in policy interest rates,” the company said.
Last week, the Central Bank further eased interest rates with the Overnight Policy Rate (OPR) being reduced by 25 bps (basis points) to 7.75 per cent. The bank’s Monetary Board was of the view that this measured easing of monetary policy stance will support steering inflation towards the target of 5 per cent, amidst global uncertainties and current subdued inflationary pressures.
Well……while the Central Bank is looking after the nation, who looks after savers who are struggling to make ends meet? Some thoughts for our readers to digest this week!
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