Business
Easing Sri Lanka’s fiscal burden: Who needs a state pension?
Priyanka Jayawardena is a Research Economist at IPS with research interests in skills and education, demographics, health, and labour markets. Priyanka has around 15 years of research experience at IPS. She has worked as a consultant to international organisations including World Bank, ADB and UNICEF. She holds a BSc (Hons) specialised in Statistics and an MA in Economics, both from the University of Colombo. (Talk with Priyanka – priyanka@ips.lk)
By Priyanka Jayawardena
Public sector workers’ pensions are paid by tax revenue, with 12% of government revenue allocated for pensions.
An IPS analysis shows that public service pensions are not a progressive welfare programme, with half of the publicly funded pensions benefitting the top 20% wealthier group.
Implementing a contributory pension fund is crucial to creating a more sustainable and equitable retirement system.
The recent economic crisis has highlighted the need to address weaknesses in Sri Lanka’s economic policies for long-term structural change. One significant issue is the financial burden of public sector pensions. The Public Services Pensions (PSP) is the largest pension scheme for permanent public sector employees in Sri Lanka. However, its non-contributory nature has become a critical burden on the country, wherein pension benefits are funded directly from government revenue, supported by general taxation. With around 700,000 public sector pensioners, this system places a significant financial burden on the government. On top of that, an IPS analysis reveals that public service pensions are not a progressive welfare programme, with half of the pension benefitting the top 20% income bracket. Such obligations further exacerbate inefficient fiscal policies, constraining resources available for crucial areas like health and education services. This blog aims to provide a comprehensive overview of the current challenges and potential solutions for easing the pension burden in Sri Lanka.
Understanding the Current Pension Burden
As of 2023, the total PSP payments amounted to LKR 372.3 billion, which accounted for 7.9% of the government’s recurrent expenditure and 12.1% of its revenue. With over 1.35 million public sector employees, the financial demands are increasing, particularly for new pensioners who receive higher payments than existing and deceased pensioners. For example, the total pension payments have increased by 20.5% in 2023 mainly due to the net increase in the number of pensioners by 4.2%. This situation is unsustainable, particularly in light of the country’s constrained fiscal capacities.
Who Benefits from the Pensions?
The better-off people enjoy the lion’s share of the PSP benefits. Employing a framework developed by the Commitment to Equity (CEQ), the distributional analysis shows that around 50% of PSP benefits go to individuals in the top 20% income bracket, while only 11% of the benefits reach the bottom 40% (Figure 1). This is mainly because PSP beneficiaries are from the better-off segment – around 44% of PSP receivers belong to the wealthiest 20% of the population. . This analysis clearly shows that PSP is not a pro-poor spending programme.
Furthermore, public service sector workers represent 15% of the employed population and benefit from secure, stable incomes throughout their careers, unlike the 67% of Sri Lankans in informal, unstable employment. This raises the question: Should the government shoulder the social security of the most stable public sector employees?
Proposed National Contributory Pension Fund for Easing the Pension Burden
To address these challenges, the government has initiated the establishment of a Contributory Pension Fund to ensure an appropriate environment in which to spend pensioners’ retirement without burdening the country’s budget. The proposed fund would require contributions from employees and the government, creating a more sustainable financial structure for pension payments. Specifically, it is proposed that 8% of the employee’s basic salary and 12% from the government be credited to this fund. The proposed national contributory pension scheme would apply to individuals newly recruited to the government service.
Way Forward: The Role of Policy and Legislation
Addressing the PSP burden in Sri Lanka requires a multifaceted approach that includes structural reforms and a shift towards a contributory pension system. By implementing these changes, Sri Lanka can create a more sustainable and equitable retirement system that balances the needs of both current and future generations.
Establishing a National Contributory Pension Fund: Effective implementation of the proposed Contributory Pension Fund requires strong policy and legislative support. Although a contributory pension scheme was implemented in 2003 to strengthen the state finances, it was revoked in 2006. The government must enact laws that mandate contributions and regulate pension fund management. Regular reviews and adjustments to the pension system should be conducted to adapt to changing demographic and economic conditions.
Gradual transition to contributory scheme: Implementing a gradual transition from the current non-contributory system to a contributory scheme can help mitigate immediate financial constraints while setting the stage for long-term sustainability. New public sector employees could be enrolled in the contributory scheme, while existing employees might have the option to switch voluntarily, with appropriate incentives.
Enhancing pension fund management: Efficient management of pension funds is crucial for ensuring their sustainability. This includes adopting best investment management practices to ensure the funds generate adequate returns. Transparent and accountable governance structures should be established to oversee the management of these funds.
This blog is drawn from an analysis of ‘Progressivity and Pro-poorness of Taxes and Welfare Spending’ in the forthcoming Sri Lanka: State of the Economy 2024 report published by the IPS.
To catalyze bilateral trade and investment and drive regional economic integration, the Consulate General of Sri Lanka in Mumbai facilitated a series of high-level strategic engagements between The Ceylon Chamber of Commerce and leading Indian commercial institutions on May 13 and 14.
The delegation from The Ceylon Chamber of Commerce was led by its Chairman Krishan Balendra, CEO of John Keells Holdings Pvt Ltd and comprised a distinguished group of Sri Lankan industry leaders from Hirdaramani Group, Maliban Biscuit Manufactories (Pvt) Ltd, Sierra Cables PLC, A. Baur & Co. (Pvt) Ltd, Jetwing Travels (Pvt) Ltd, Ceylon Biscuits Ltd, Hayleys PLC, Vidullanka PLC, MAS India Clothing (Pvt) Ltd, Tudawe Brothers (Pvt) Ltd, David Pieris Holdings (Pvt) Ltd, Bank of Ceylon, Aitken Spence PLC, LTL Holdings Ltd. and Orel IT Pvt. Ltd.
On May 13, The Confederation of Indian Industry (CII) and The Ceylon Chamber of Commerce jointly hosted the ‘India–Sri Lanka Business Forum: Partnering in Sri Lanka’s Growth and Investment’ and an exclusive CEO interaction in Mumbai. The forum convened senior government officials, policymakers, and industry leaders from both countries.
These included, among others, High Commissioner of Sri Lanka to India Mahishini Colonne; Consul General of Sri Lanka in Mumbai Priyanga Wickramasinghe; Senior Economic Advisor to the President of Sri Lanka Duminda Hulangamuwa; Secretary (Protocol, FDI, Diaspora & Outreach) and Chief of Protocol Government of Maharashtra Rajesh Ravindra Gawande; Co-chairman, CII Western Region Sub-committee on International Trade & Investment and Chief Executive Officer, Polycab India Ltd. Anurag Agarwal; Chairman, CII Western Region Sub-Committee on Tourism and Hospitality and Executive Director, Kamat Hotels India Ltd Vishal Kamat and Secretary General & CEO of The Ceylon Chamber of Commerce Shiran Fernando.
Conversations centered on accelerating cross-border cooperation across high-priority sectors, including technology, manufacturing, healthcare, renewable energy, and digital transformation.
On May 14, the delegation engaged in productive Business-to-Business sessions with the IMC Chamber of Commerce and Industry, culminating in the formal renewal of the Memorandum of Understanding between The Ceylon Chamber of Commerce and IMC. The delegation also participated in an interactive session hosted by the World Trade Center (WTC) Mumbai and the All India Association of Industries (AIAI).
The two-day mission concluded with a robust exchange of views cementing a strong foundation for sustained bilateral collaboration and paving the way for a new era of industrial synergy between Colombo and Mumbai. (Consulate General of SL, Mumbai)
Demonstrating its commitment to supporting the nation’s next phase of economic transformation, Commercial Bank of Ceylon has become one of the first banks in Sri Lanka to enter into an agreement to establish a fully-fledged branch at Port City Colombo, marking a significant step in the Bank’s strategic expansion into the country’s emerging international financial hub.
The agreement was signed by Sanath Manatunge, Managing Director/CEO of Commercial Bank, and Xiong Hongfeng, Managing Director of CHEC Port City Colombo (Pvt) Ltd. The partnership further reinforces Commercial Bank’s position at the forefront of Sri Lanka’s evolving financial landscape.
The proposed branch will function as a fully-fledged banking branch, offering a full spectrum of products and services tailored to the needs of corporates, investors, businesses and retail customers operating within the Port City Colombo ecosystem. These will include digital banking facilities, trade services, foreign currency transactions, corporate banking solutions, deposits, lending, card services and remittance facilities.
By establishing a presence within Port City Colombo, the Bank said it aims to further strengthen its ability to support cross-border business and investment flows while positioning itself to meet the sophisticated requirements of global investors, multinational corporates and high-net-worth individuals expected to operate within the Special Economic Zone.
Commenting on this ground breaking initiative, Sanath Manatunge, Managing Director/CEO of Commercial Bank said the Bank’s decision to establish a fully-fledged branch within Port City Colombo reflects both its long-term confidence in the project and its readiness to support the evolving needs of a globally integrated financial ecosystem.
“As Sri Lanka’s largest private sector bank with a strong track record in serving corporates, international clients and high-value businesses, we see Port City Colombo as a pivotal development in the country’s economic future,” he said. “Our presence within this Special Economic Zone will enable us to seamlessly support cross-border transactions, facilitate international trade and investment, and deliver world-class banking solutions backed by advanced digital capabilities. Being one of the first banks to formalise plans for a full-service branch within Port City Colombo reaffirms our role as a pioneer in driving financial innovation and supporting national development.”
A 269-hectare extension of Sri Lanka’s central business district, Port City Colombo is being developed as a multi-service Special Economic Zone designed to serve as a regional financial centre, business and lifestyle hub. One of the largest public-private partnership projects in the country, it is envisioned as a catalyst for high-value investments, underpinned by advanced infrastructure, cutting-edge technology and a progressive regulatory framework.
“Our role as master developer goes beyond building the city itself. It is about creating the foundations for a functioning international business and financial hub,” said Mr Xiong Hongfeng, Managing Director of CHEC Port City Colombo (Pvt) Ltd. “The establishment of institutions such as Commercial Bank within Port City Colombo is an important part of that process, because it brings real operational depth and credibility into the ecosystem from an early stage. It reflects the broader momentum behind the project and the growing shift towards a more globally connected, investment-driven economy in Sri Lanka.”
Sri Lanka’s renowned specialty tea brand “Singharaja Wiry Tips,” produced by Lumbini Tea Valley Ceylon, has won two major accolades at the prestigious “The Leafies International Tea Awards” held recently at Fortnum and Mason in the United Kingdom.
The award-winning low-grown Ceylon tea secured the titles of “Best Ceylon Black Tea” and the overall “Best of All Black Teas,” emerging as the top black tea entered at the international competition.
With these latest honours, “Singharaja Wiry Tips” has now earned its 43rd and 44th international awards, further strengthening its reputation as one of the world’s most highly awarded black teas.
Classified as FBOPF EX SP (Flowery Broken Orange Pekoe Fannings Extra Special), the tea is named after its distinctive golden-tipped wiry leaves and unique flavour profile derived from the ecosystem surrounding the UNESCO World Heritage-listed Singharaja Rainforest, which borders the Lumbini plantation.
Lumbini Tea Valley’s latest innovation, “Lumbini Screw Buds,” also received high commendation at this year’s competition, highlighting the company’s continued excellence in producing premium Ceylon teas.
Chairman and Managing Director Chaminda Jayawardena, who accepted the awards in London, credited the achievement to the dedication of the Lumbini workforce and the support of nearly 1,800 tea farmers supplying high-quality green leaf harvested using the traditional “two leaves and a bud” method.
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