By: Staff Writer
March 08, Colombo (LNW): A government programme designed to protect the savings of Sri Lanka’s elderly has turned into a major fiscal headache, forcing authorities to rethink how the state supports retired depositors.
The latest chapter unfolded when the government shut down enrolment for its “3 percent extra interest” scheme for senior citizens at the end of 2025. Although existing participants will continue receiving the subsidy until their deposits mature in 2026, no new government-backed accounts will be permitted.
The move follows revelations of large unpaid obligations linked to earlier interest subsidy programmes.
Finance Ministry sources say hidden arrears tied to senior citizen interest schemes reached around Rs. 138 billion. The discovery prompted a review of the programme’s long-term viability and triggered major policy changes.
The International Monetary Fund also flagged the scheme as a contributor to fiscal stress. According to IMF analysis, the annual cost of maintaining the subsidy exceeded Rs. 63 billion by 2022, highlighting how rapidly government support had expanded.
Officials say these financial pressures ultimately forced the state to withdraw from directly supporting deposit rates for retirees.
Instead, the government is shifting toward a system that prioritises settling past debts while offering targeted assistance to vulnerable elderly citizens through broader social welfare policies.
Sri Lanka’s senior citizen interest scheme has gone through several major transformations over the past decade.
The first phase began in 2015, when the government introduced a guaranteed 15 percent annual return for senior citizen fixed deposits up to Rs. 1 million. While the policy initially helped retirees secure higher income from savings, it created a structural problem once market interest rates began to change.
Banks continued paying the promised returns to depositors, but the government was responsible for compensating financial institutions whenever market rates fell below the guaranteed level. Over time, the subsidy bill ballooned and payments to banks began falling behind.
The result was a growing backlog of unpaid obligations.
To stabilise the situation, the government’s 2026 Budget has allocated Rs. 45.7 billion to begin clearing the accumulated debt owed to banks under the earlier scheme. Overall, authorities plan to settle approximately Rs. 126 billion in various government arrears by the end of 2026.
A second phase emerged in mid-2025 when the government introduced a revised interest support programme aligned with IMF reform guidelines.
Instead of guaranteeing a fixed return, the state offered seniors a modest premium 3 percent above the Average Weighted Fixed Deposit Rate for deposits of up to Rs. 1 million with a 12-month tenure.
The subsidy was funded through an allocation of roughly Rs. 15 billion to Rs. 30 billion for the limited six-month enrolment period.
But by late 2025, policymakers decided that continuing the programme risked creating new financial obligations.
Under the new policy direction reflected in the 2026 Budget, the government is moving away from large-scale interest subsidies and toward a more disciplined fiscal approach.
Officials say the focus now is on repairing public finances while ensuring assistance reaches the most vulnerable elderly citizens without creating another cycle of hidden debt.