In a significant reversal of fortunes, Sri Lanka’s Central Bank has recovered billions of dollars in lost value for the Employees’ Provident Fund (EPF) over the past two years, after a disastrous currency collapse in 2022 wiped out nearly half the fund’s worth. The turnaround comes as the Central Bank, under Governor Nandalal Weerasinghe, embraced a return to monetary orthodoxy and stabilized the rupee.
Official data shows that the EPF, which had fallen from $15.8 billion at the end of 2021 to just $9.53 billion in 2022 amid a currency crisis, rebounded to $12 billion by the end of 2023 and further to $14.96 billion in 2024. The recovery of $5.43 billion over two years recoups the bulk of the $6.29 billion loss experienced during the 2022 rupee collapse.
At the heart of this reversal is a commitment to sound money policies—treating the rupee once again as a store of value and standard for deferred payment. The collapse of the currency in 2022, when the rupee plunged from 200 to 360 per dollar amid failed attempts to float it while enforcing surrender rules, inflicted a de facto “haircut” on EPF savings, including interest earned.
In 2023, following the removal of the surrender requirement and the implementation of deflationary monetary policy through contractionary open market operations, the Central Bank was able to engineer a balance of payments surplus. This allowed the rupee to appreciate to 232 per dollar, restoring investor confidence and halting the erosion of savings.
By keeping the exchange rate around 300 per dollar in 2024, the Central Bank continued to uphold the rupee’s purchasing power, ensuring that investment income in the EPF retained its real value. With inflation falling to -1.7 percent by the end of 2024, the real interest rate for the EPF rose to a solid 12.7 percent, a stark contrast to the negative 48 percent seen during the 2022 crisis.
Despite minimal net contributions—2023 saw a net outflow of 5.3 billion rupees and 2024 brought in only 46.3 billion rupees—the EPF grew organically, driven primarily by investment income exceeding 450 billion rupees annually. In contrast to earlier crises, where flexible inflation targeting policies led to rupee devaluation and loss of external value—such as in 2018, when the rupee fell from 152 to 182 per dollar—the Central Bank’s more disciplined approach has stabilized both the exchange rate and investment returns.
The return to monetary stability also stands in contrast with the Fed’s evolving framework, which has attracted criticism for undermining the U.S. dollar’s long-held reputation as a global store of value. In Sri Lanka, sound money has not only helped shore up domestic confidence but also revived foreign investor interest, with many previously deterred by rapid depreciation.
The restructuring of domestic debt—particularly term extensions of EPF-held government securities—has generated concern. However, as confidence returns and interest rates fall, the extended fixed-rate securities may ultimately yield higher real returns compared to rollover instruments at lower future rates. The full impact remains to be seen, given the lack of clarity on coupon adjustments.
Ultimately, as classical economists like David Ricardo emphasized, the external and internal value of a currency are intrinsically linked. The recovery of the EPF, both in nominal and real terms, serves as a case study in how disciplined monetary policy can repair trust, rebuild national savings, and stabilize a nation emerging from crisis.
