By Amila Muthukutti –
Economic implications of the coronavirus are long-term and more severe than health implications, because people fear of hunger more than dying from the virus. Global supply chain is disrupted unprecedentedly, weakening supply side of the economy. This situation leads to a crisis, mainly not because of weak demand, but because of weak supply or disrupted supply chain. Accordingly, many economies in the world have already taken various measures to cut their rates and introduce stimulus packages. However, economists have given a negative outlook for the world economy, given this situation. Ruchir Sharma, Chief Global Strategist at Morgan Stanley, recently in an interview with India Today, stated that if the coronavirus pandemic was not brought under control by May, we could be staring at a situation similar to the Great Depression of the 1930s.
State of affairs
It is important to discuss how Sri Lanka can face economic problems during post coronavirus period, especially taking in to account factors like level of public debt, fiscal situation, monetary measures already taken, GDP growth and many more. In fact, these are the factors that determine how resilient the economy is. These factors are not so positive for Sri Lanka.
Two months ago, Standard and Poor, a rating agency, had downgraded Sri Lanka’s credit rating to negative from stable. They further stated that negative outlook reflects their view that a larger-than-expected fiscal deficit will increase the government’s financing needs and concerns over debt sustainability. Moody’s, a rating agency, has said that Sri Lanka is among several low rated emerging countries that are facing significant rollover risk amid currency depreciation and an increase in credit spread. Rollover risk is a risk associated with refinancing of debt. In other words, this refers to a possibility of a borrower being unable to replace an existing loan with a new one. The International Monetary Fund projected GDP to grow at 3.7% in 2020. However, the current situation has been so deteriorated that some economists have forecasted negative economic growth rate for this year. The rupee has deprecated by 4.7% in first three months of this year, mainly due to the impact of the coronavirus. Furthermore, Rs. 11.71 Bn for the last year and Rs. 4 Bn for first two months of this year could be observed as net foreign outflow from the Colombo Stock Exchange.
The Central Bank of Sri Lanka cut their policy rates further to support economic activities amidst the spread of the coronavirus. In my opinion, the Central Bank is likely to cut rates further, when economic activities get back to normalcy. Moreover, President Gotabhaya Rajapaksa also decided to grant relief to the public by giving a grace period for repayment of loans, given economic impact of the coronavirus.
Even though these measures are commendable, there is a necessity for the government to be actively involved in the economic activities for cushioning the impact of the coronavirus. For that purpose, Ajith Nivard Cabraal, Senior advisor to the finance minister, has suggested that Sri Lanka should return about 20% of Employees Provident Fund (EPF) balance to holders, after the Coronavirus pandemic ends. The amount will be Rs. 500 Bn. As the government has already given a stimulus by cutting taxes in January, it is no longer in a position to cut taxes, compromising government’s revenue. Even though it was politically popular, tax reductions by significant percentages came under criticisms, mainly due to weak fiscal situation that already existed in the economy. Hence, the government could have followed this EPF strategy in place of cutting taxes.
This can be the last resort for the government to stimulate the economy, during this difficult period. Nevertheless, when we have a look at investment portfolio of the EPF, 92.2% of the fund had been invested in Treasury Bonds and Bills by the end of 2018. Even if data is not publicly available for the last year, it can still be assumed that a similar percentage of the fund is currently invested in Treasury Bonds and Bills. Consequently, they have to be highly concerned over the impact on the fund as well as the entire economy, if they decide to liquidate bonds for this purpose.
It is crystal clear that Sri Lanka will have to take extreme austerity measures in the future, whether or not this suggestion will be put into action. As suggested, if people will be able to claim for 20% withdrawal, what they spend on will be a critical factor that needs to be carefully looked into. Because a majority of the EPF beneficiaries represents middle income segment of the population, they are likely to spend on imported things like vehicles, consumer durables, gold and many more considered essentials of the middle income life pattern. Accordingly, restrictions need to be imposed on discretionary imported items.
There is a very low possibility that a person in middle income category will give up his job and start a new business with his EPF money. Therefore, it can be expected that most of the funds will be used to spend on consumption. It does not matter, as long as they do not highly spend on imported things. There should be a well-planned program to encourage producers and create new entrepreneurs in the economy. Otherwise, expected outcomes by implementing this strategy cannot be achieved.
CLARENCE / April 1, 2020
THIS IS A CLEVER IDEA TO LOOT THE MONEY.
AND THE SECOND BEST TO TSUNAMI FUND LOOT
Burt / April 2, 2020
Don’t worry Basil says: “TRUST ME”
Inguru da Silva / April 3, 2020
cabbie robbed the EPF once or was it twice, now he is on another round. Why doesnot the EPF members get together and play foot ball with him. the foot ball – cabbie himself. Use steel spiked shoes.
Milton Silva / April 3, 2020
Yes, wise idea given by rajapakse ‘s “Arthika” pandit to looting money from EPF which is only available resourceful find with treasary. Sorry to poor private sector employees who shed thier blood, and save some for thier rest period of life. Basil & Ajith Co. Clever enough to play public funds.Ane saadu..saadu..saaaaadu Sri Lanka
chiv / April 1, 2020
Though I am a layman and not a financial expert, I had expressed my concerns on the same lines , many a time. Now that Cabraaaal is out with his plan, to me it is a obvious “mother of all Ponzi Schemes”. Good Luck to all EPF holders. Talking about austerity measures ????? not in Lanka Bro. That too in a election year, no way. Elections are the time for freebies , voters are usually gifted with money and material with the smiling faces of their politician imprinted on it. Jeyawewa.
Ajith Perera / April 1, 2020
We need a cash stimulus and there is no doubt about it. This isn’t the time to think about inflation or the budget deficit. We need multi pronged cash injection immediately. The tax payers will keep paying the government servants, but how about the private sector employees? Our labour laws are rigid and difficult to retrench staff and hence a wage and salary rebate is required and should be guaranteed by the government.
Currently the impression is that the government would like the private sector employers to foot the bill which is not sustainable. Also private banks and finance companies to suffer losses and help the borrowers.
What is required is a massive cash injection to the economy which should be ideally USD 5 billion. Apparel companies and tourism sector employ more than 1 million people and how are they going to be paid?
Nimal Fernando / April 1, 2020
I have a EPF account and I have no issue in getting about 25% of my balance at my discretion.
Cannot see a problem with that. Also if an employee is over 50 years, they should offer even up to 80% of the balance since anyway they would retire at 55 years and if at all after that they would be employed on one year renewable contracts.
What is the big issue here?
My car – my petrol
Dr. Gnana Sankaralingam / April 1, 2020
This happened in 2012 when MR tried to swindle EPF/ETF money. The then chairman of Bank of Ceylon Gamini Wickremasinghe where EPF/ETF funds are kept opposed it, and when he was unable to prevent MR swindling the money, resigned his post as he did not want to be a part of this fraud. We need people like that, and not stooges like Nivard Cabraal who is accused of Ponzi scheme and Greek bond scam.
Lal Wijeratne / April 1, 2020
Re Chiv comment Cabraal has a connection with Anura Fernando who ran a Ponzi scheme Anura is now on the SLPP list for Colombo
K.A. Sumanasekera / April 2, 2020
I wish Morgan Stanley’s Mr Sharma focused on what is happening to the Dalits in Hindia.
Poor souls lying on the roads on their bellies and plaeding with those overfed Jawans not to beat them up withose Long Sticks isa heart braking to watch..
Mr Modi sat on his ass when the Chinese were fighting hard to eliminate the Virus and protect the Dalits..
When the Shit Hit the fan in Hindia, Mr Modi orrerd a Lock Down , where Millions of migrant workers were trapped in the Cities .
And no way of getting back to their Homes..
Even if they mange to walk back to their homes , I don’t know what they are going to eat with those long Curfews..
Thanks to our new President , our Inhabitants have a better chance of survival.-
20 % of EPF which is LKR 500 billion certainly will boost the demand side of the Economy.
I don’t think any of them who are going to take the 20% will have enough even in their 100% to buy Motor Car.
If our Yahapalana Rulers didn’t rob 11 Billion from the EPF, that is extra 2% which our inhabitants would have been able to get.
How disgusting it was to give the Kotte Mates LKR 34 Million Santhosams when our FPF members don’t have even One Million in their EPF Savings..
Those Free Yahpalana permits were then sold to Rich in Colombo, the Muslim Traders in particular who spent up to LKR 100 Million plus to import Mercs and Beamers using our House Maids FX kitty further damaging our Balance Sheet..
Don / April 3, 2020
EPF was robbed in 2013 and the bond scam in 2015 with the same people involved. Get it right bottom dweller.
Keerthi Perera / April 6, 2020
under the present circumstances, external borrowing is impossible and foreign remittances will be reduced by a considerable percentage. Need to reinvigorate internal economy by restricting imports , cutting down salaries of government staff , reducing staff of loss making semi government organisations like Sri Lankan Airline, releasing small percentage of EPF contributions direct to account holders who are old and due to retire in next few years. Confidence of Sri Lanka dollar bonds must be boosted by paying coupons on due dates and rolling over debts due to mature by few more years at the same interest rates. Country’s credit rating need to be restored before seeking any external credit. must pursue debt moratorium for few years till the economy is running and a new government is formed.