Sri Lanka will need a plan to deal with a new world economic structure that will have to be developed to face the ‘post-Covid 19’ era challenges.
A series of revival strategies will be introduced shortly. The first is discussed below.
Strategy 1: Return approximately 20% of the balances, amounting to around Rs. 500 billion of the Employees Provident Fund, lying to the credit of members, directly to members.
As is well known and documented, Sri Lanka suffered tremendously from the gradual and continuous deterioration of the economy for five years from 2015 to 2019. It was also devastated by the Easter Sunday bombings in April last year. In response, the new Government gave a substantial stimulus in January 2020 in the form of significant tax cuts and a far reaching debt moratorium.
In this background, Sri Lanka unfortunately does not now possess the fiscal space to provide a stimulus of the kind practised by certain advanced economies, in the face of the current Covid-19 pandemic, whereby huge tax refunds or outright grants have been provided to the public to boost consumption and other economic activity.
As an alternative to providing a direct fiscal hand-out, around Rs. 500 billion could be infused into the economy by unconditionally returning around 20% of the EPF member balances to members, of the total of around Rs. 2,500 billion lying to the credit of members as at December 31, 2019.
This simple and uncomplicated return of capital could be a useful and viable alternative that could achieve the same outcome of serving an economic stimulus, without any fiscal burden being placed on the Government.
This newly created ‘equity’ in the hands of around 2,500,000 people would expand further and perhaps even double, as many recipients are likely to leverage such funds with borrowings from lending institutions, which would provide a further boost to the economy. By ‘unlocking’ this vast pool of funds at the present time, and through the release of such finances which would circulate among millions of people, many other ‘knock-on’ benefits would also accrue to the people and the economy.
Among the benefits would be:
(1) Enhanced economic growth due to the higher investment and consumption as a result of the funds infusion.
(2) Many people being crippled by high interest debt will be able to settle them.
(3) New business ventures being created as a result of people with entrepreneurial ideas and abilities being able to embark on new business ventures.
(4) More opportunities opening up for the financial sector to lend, since people embarking on new economic activity are likely to leverage their new equity with debt.
(5) Business confidence being enhanced and optimism rekindled due to the higher level of economic activity as a result of investment of the newly released ‘locked’ savings, in the wider economy.
(6) An upturn being recorded in the small-scale construction activity in all parts of the country, which is now at a standstill.
(7) Enhanced employment opportunities arising in the Small and Medium Enterprises sector of the country, leading to lower social tensions.
(8) Improvement in Government tax revenue due to the rise of the level of economic activity throughout the economy.
More revival strategies will be introduced in the coming days.
-The writer is the Prime Minister's Senior Advisor on Economic Affairs and a former Governor of the Central Bank.