POSSIBLE ECONOMIC EFFECTS OF THE PROPOSAL OF MR. AJITH NIVARD CABRAL TO RELEASE A PART OF PROVIDENT FUND
Posted on April 1st, 2020

BY EDWARD THEOPHILUS

It seems that the proposal of Mr. Ajith Nivard Cabraal to release 20% of EPF balance to members is quite controversial as it would involve in positive and negative outcomes if the proposal implemented without experts’ opinions and a proper mathematical model. What is policy research say about the proposal, especially what is opinion of Dr.P.B. Jayasundara, the secretary of the President who is a theoretical and practical economist. The proposal may involve in broader macroeconomic effects and it should be discussed from different points of view.  Theoretically, it is a Keynesian style of advice and it might immediately impact on increasing inflation, which gives negative impact to the country. Think about the war time experience and the view of John Menard Keynes, who was concerned on the excess capacity of the economy.  I saw a report, which was based on a trade union opinion that may have focused on political views to attract people during the election period.  I would like to identify the broader points involved in the proposal.

  • If the government decides to release 20% of FPF balance to its members a large sum of money will go to the economy increasing the aggregate demand of the country. An increase in aggregate demand good for a country when there is an excess capacity because it will support increase production thereby expand employment and national income. The issue in relation to Sri Lanka is whether the country has an excess capacity. Central Bank of Sri Lanka or any other authorized research institution needs to express a clear opinion in which area there is excess capacity and industries related to such areas could be increased productivity in the short run.  The other side of the issue is although there is excess capacity in certain industries, has people got a preference or teste to demand goods in such production areas.  Therefore, it is a highly complicated area to investigate before making decisions.  Many developed countries made policy decisions to release a part of superannuation balance and it may positively impact the economies of developed countries, however, it might not appropriate to Sri Lanka.  Developed countries concerned on the increasing unemployment and paying subsidies or benefits to unemployed.
  • The general experience in Sri Lanka is when people get money in hand, they would use to spend them either consumption or purchasing of unnecessary goods and services or imported goods.  This would be concerned with deteriorating foreign exchange reserves and to further depreciate the foreign value of Sri Lanka’s rupee. Sri Lanka needs a rationale to reduce import and promote exports. Will the proposed idea consist with the rationale? Therefore, the release of 20% of the balance in EPF should not be giving a razor blade to monkeys. People need to wisely spend their long-term savings and if they use long term saving unwisely it would be a problem to people and the government.
  • EPF is mainly control and managed by the Central Bank and trading banks also manage own funds.  If the government release 20% of the balance in Central Bank managed fund the other funds would be needed to allow its members to follow similar policy and it might impact the liquidity level of trading banks. I have not conducted any research on this matter and my view is a mere opinion and it should be practically assessed.
  • The release of a 20% fund would positively impact the increase in inflation by the pull of demand and when inflation increases Central Bank must use monetary policy instruments increasing the interest rate and such action might impact the supply of credit and savings. In developed countries cash rate was reduced by central banks. In Sri Lanka monetary policy action to increase interest to control inflation will negative for business increasing financial expenses.  The other aspect is the action (increase in inflation) would increase the general price level of the country supporting for trade unions to struggle for wage and salary increases.  The government generally will be unpopular among ordinary people and it will be a supply of weapons to the opposition against the government.
  • EPF considers as a part of general saving and when 20% releases it will be caused a decline in savings level of the country.  We believe that savings in a country are equal to investment and a 20% decrease in saving level would create fiscal problems and force the government to increase borrowing to balance the budget.  Sri Lanka needs to increase general savings to reduce domestic debts.  The other problem is an investment in bonds because the capacity of EPF would reduce and the government needs to look investors for bond investments.

The release of 20% of EPF would be a macroeconomic problem and the impact of the decision would vary and need to consider many areas. That is why I believe it needs to develop a mathematical model in which variables should be needed to identify considering broader factors.

Sri Lanka is not a developed country although it talks in billions of rupees due to the dramatic decline in the value of the rupee.  Sri Lanka has disparities in development and growth It must identify appropriate policies than blindly following developed countries.   

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