 “Do what you want to do, say what you want to say,” sang The 5th Dimension, the most underrated band of the sixties “cultural revolution” in the United States.
The same can be said for the government’s curious attempt to introduce a universal pension scheme for workers in the private sector. Although the objectives may be honourable, the execution leaves much to be desired.
Universal pensions benefit the lowest paid in society, and helps provide confidence to a large pool of workers who will not have enough savings to fund an increasingly long retirement. What makes this move bizarre though is the rather high burden this would transfer on the state in another decade as the population begins to age and live longer at the same time.
In that light, the only logical explanation for this action is the need for an urgent cash injection by the state, with the funds at the EPF and ETF the only viable source. The bill then is not a panacea for the longevity problem or under-funding of retirement. Rather it seems to be a solution for the looming debt stock of the country.
Debt servicing is currently an expensive business and it will only get worse, unless tamed early. Unfortunately, now is the time the country desperately needs to raise development finances. As further debt would erode the longer term credit outlook, raising the cost of funding, the government seems keen to find a cheaper funding source.
Pension funds offer some of the cheapest and best long term funding for infrastructure development. However, that is a decision an independent trustee should be making on behalf of the investors of the fund, not the government as it creates an obvious conflict of interest.
There is a way out of this mess and it involves less pain all around with everyone getting what they want. The solution requires discipline on the part of the government and a commitment to reforms in the medium term. Most of these have been articulated by experts in the relevant fields for a long time, sadly unheeded.
Solving the debt problem
The country is not facing a structural debt crisis. Mismanagement from this point, will definitely lead to such an event. In such an unfortunate event, the only solutions will be inflation or restructuring, both will spell disaster for the government of the day. While the current retiring strategy is attractive (replace higher cost debt with lower issues), longer term spending cuts are a better option. The main way to cut costs is to remove fuel subsidies and reduce the size of the government, both politically difficult in the short term but attractive in five years when the government has to return to the polls.
The easiest way to cut the fuel subsidies and energy consumption in general is to reduce the tax (in fact have no tax) for hybrid vehicles and increase the tax on other engine types. Switching all government vehicles and public buses to similar schemes over a four year period will have a major impact on the budget bottom line. During the 1979 oil crisis, Europe was generating more than 80% of their electricity using crude oil. This number was cut to less than 30% by 1984. Reducing crude oil use by multiple factors over a short period of time can be done. As for reducing the size of the government, only education and health care need to be protected. There is an immediate possibility to cut the rest of public expenses by 30% if proper technologies are adopted.
Unlock private capital for development
As this column has argued in the past, there is plenty of discretionary money in the country sitting idle on the balance sheets of companies and bank accounts. With investor fondness for the share market, the government should float a few public-private partnership (PPP) vehicles targeted at development projects on the market. These should be managed by independent private boards, with the sole aim of delivering returns to share holders, and no other objective.
Such vehicles will also generate plenty of interest by global pension funds, which are looking to expand their allocation to infrastructure funds over the next five years.
Reform the regulatory framework
It’s high time we have an independent Central Bank, who can be tasked with charting the course of fiscal stability of the country, whose senior officials need to be appointed by the President, with confirmation by Parliament. This needs to be followed by a break up of the regulatory framework, with a Prudential Regulator set up for the banking system and all other corporations (listed and unlisted) coming under the preview of the Securities and Exchange Commission.
This will remove the current responsibilities from the Central bank, and provide confidence to any depositor that “shadow banks” or fraudulent deposit takers do not exist. Next up should be the complete independence of the management of both the ETF and EPF. While this can sit under the Central Bank’s overall authority (as in Norway) the management should be independently elected. An independent investment committee can then make investment decisions in the best interest of investors, not any other master.
Control what counts to increase confidence
In the absence of a universal pension, the government should increase spending on health care and introduce strategies to maintain food and energy price stability. As the three key components of retirement spending, strategies aimed at controlling and improving the quality and efficiency of delivery of these services would be a welcome confidence booster to retirees, who can then focus on self-funding their finances.
Even in countries with universal state pensions, such as Australia, the inability to control retirement inflation running above 10% have ruined the quality of life for most retirees.
Innovation will help the most
The current tax rules and support structures dissuade innovation. Innovation is the only sustainable long term employment generator for an economy as small as ours. Helping foreign companies set up domestic operations without taxes and compensating them by taxing local small industries doesn’t encourage innovation. Neither does expensive financing.
Obsessing about becoming the “next Singapore” (whatever that means) does no good. It’s a unique model that worked well for them, and the non-democratic bits crucial to that success are impossible to replicate. If there is any country which provides a good economic model for Sri Lanka, it’s a tiny speck to our West that has quietly been one of the greatest innovation engines over the last half century, driven by necessity of her geography and government inducements. Israel’s per capita innovation is unmatched by any country, during any period in history.
Israel’s successful venture capital industry has produced intergenerational wealth creation abilities through a focus on relentless pursuit. A large Diaspora has helped. Government policies have aided that success even more.
Reforms present the only way out of the current quagmire. If a fictional writing exercise and piffle can create the current challenges in our foreign relations, messing around with bond markets is an exercise best left unexplored. Just ask the Greeks how much it hurts when bond markets do send signals.
(Kajanga is an Investment Specialist based in Sydney, Australia. You can write to him at kajangak@gmail.com). |
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