By Hema Senanayake –
The government could be an economic facilitator or provider. Economists usually prefer to have a facilitator government due to a fundamental reason which is linked to an efficiency factor. However, what Maithri has promised us is a “Provider” government at least in the first 100 days, but it has a vision. That would be a better beginning in view of the economic difficulties faced by wage earners and businesses of all categories except a few. But a gradual transition to a more facilitating role would be a must in order to ensure a vibrant and dynamic economy.
The manifesto published in the language of Sinhala is an interesting document. In the document there are 100 promises which are to be implemented within the first 100 days. For example, the very first proposal is to increase salaries of government employees by Rs. 10,000/= per month and half of it would be paid with the February salary. Once all adjustments are done the balance Rs. 5000/= would be paid with due arrears.
The above is a proposal that has a direct impact on the national budget. It is true. Still the salary increment would positively change the demand function of the economy and also the debt obligations of the workforce. Both help to increase business and economic activity. Then one might think if wage increases are positive why the government did not do it before and do it every year.
One reason is that some economists prefer to bring down inflation and build more foreign reserves than necessary. The other reason is that general salary increment change many variables of the economy hence any salary increment must be able to mitigate the bad effects. Wage increases might increase the inflation a little bit and put a little more pressure on the demand for U.S. dollars and other reserve currencies. But it is also true that the inflation component related to the salary increment is relatively lesser than some economists think. For an example if the salary increment of the total work force is 20%, the inflation that it could cause would be 3%-5% or so.
Therefore, as at now, the economy could easily mitigate a moderate inflation that is caused by wage increase. But with any inflation poor people and retirees would be vulnerable. Therefore, there should be proposals to take care of the most vulnerable people. Maithri has proposed to take care of them too. He proposes to increase the “Samurdhi Allowance” by 200% and provide retirees with an interim pension increment of Rs.3500/= per month until the pension anomalies are remedied; hence so far so good.
Yet, under the proposal number 5, it is proposed to increase the rate of interest from 12% to 15% paid to senior citizens for their fixed deposits not exceeding rupees 1 million. The suggested rate is well above the market rate of interest. The market rates are the rates that can prevail in any economy. The suggested rates which I call “the directive or the administrative rate of interests” usually are based on the whims and fancies of the government bureaucrats but not on prudent macroeconomic or financial principles. Hence, it cannot prevail in the long run. However, it is a legacy inherited from the Rajapaksa administration.
However the basic economic issue that intends to address by paying higher rates is the lack of income for non-working senior citizens. Most of them are retired from the private sector with having lump-sum money. But these retirees issue cannot be solved by paying higher rate of interest than the market rates. Instead the best and only viable solution is to arrange a pension and it should not be a pension based on the principle of “save for your retirement” pension. Since I wrote a separate article on pension planning I do not intend to discuss details on pension planning here.
Instead, I insist that the viable solution to address the old-age-poverty of those who worked for years and years during their adulthood is to organize a pension scheme. In his proposals he never missed this point too. In fact he has proposed to devise various pension programs for formal private sector employees and for those who work in the informal sectors of the economy. This is part of his vision. And it is the answer to avoid the future anomaly of having to pay “directive rate of interests” to any depositor/s. This is one of the reasons why I say that he starts with a “provider government” but intends to move forward with a vision.
Now let us get back to the issue of being put pressure on increasing dollar demand due to the increase of salary. The increase of salary would increase the buying power of consumers. In addition the salary increment would increase credit growth for both consumption and for some “investments.” Part of this money would increase imports which are necessary to support increased consumption and investments. You need dollars to import. This is why that an additional pressure on dollar demand takes place when the general buying power of work force is increased.
The increased dollar demand would change the rate of exchange. Or in other words it could devalue the local currency against reserve currencies. Such unintended fluctuations are extremely negative on the economy. But the solution here is to increase the inflow of non-credit-based hard currencies known as U.S. dollars, euros, etc. Maithri has a plan for it. Under the proposal number 37, it is envisaged to win back the GSP+ for the country. That will increase exports to Europe. Increasing export income is one of the important ways to increase the inflow of non-credit-based dollars. Therefore, in this regard too Maithri has a vision. It is a vision for a facilitator government. This is good.
My observation is that Geneva investigations has nothing to with GSP+, instead the current human right record and good governance have some bearing on GSP+. Since Maithri promises to improve human rights and good governance I feel the approval of GSP+ would be relatively quicker.
I am not going to analyze each and every economic proposal. Instead I would say that the economy is a system. The changes that you make in one area would affect many other areas of the economy. For example we saw above that the simple increment of salary itself is an equation (or function) of many variables such as overall demand, inflation, credit growth, exchange rate etc. When I look at the Maithri’s overall proposals for his “Provider government” I see that there is an underlying “vision” of a facilitator too.
But the most important thing in economic management is to ensure the financial stability always. In general, the corruptions at any level would not cause an economy to collapse quickly but financial instability would. Hence, in light of the financial stability, some proposals must be revisited carefully once the new government is sworn in.