Loss for the old, forever!
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Most of the farmers these days are elderly persons
Who did Sri Lanka’s economic crisis destroy the most? Talal Rafi, a Senior Global Management Consultant at Deloitte and development economist as well as a friend of mine too, asked this question in his Twitter message last week. In fact, it was just this week that Talal won an award from the IMF for one of his papers published there.
The answer to the question that Talal raised is in the rest of his message, which reads as follows: It’s the “elderly” who saved all their life for retirement and now their savings have lost half their value to inflation. Salaries, fuel, food etc. will eventually adjust to inflation but what the old people lost is forever. Sad reality!
After reading the message, I thought of taking this point to elaborate on the harsh truth of the man-made economic crisis in Sri Lanka. I categorically designate this crisis as “man-made” because we have created and nurtured it through our economic mismanagement.
In the midst of the crisis, working people increasingly struggle to manage their incomes and expenses, while the youth fell into a state of hopelessness about their much-awaited future. And it was the elderly people who encountered a “permanent loss” as they have no avenue of recovery through adjustment.
Heartless decision
It was about two years ago when a retired person who was living on interest income from his lifetime savings in a fixed deposit, communicated to me his anger over the lower interest rates. The reduction in interest rates at that time was, as he called it, a heartless political decision because “…without providing safe outlets for investing one’s lifetime’s savings, and benefit schemes and health insurance, the retirees have been suddenly pushed against the wall”.
Even though what he said was true, the historical reduction in interest rates since the outbreak of the COVID-19 pandemic was an outcome of a more complex set of economic and political factors. And it was limited to Sri Lanka alone. Given the lower inflation at the time, the fixed deposit rates had fallen to historically lower levels around 5 per cent, the savers’ interest incomes reported a loss by about half.
Although interest rates started rising to unprecedented heights now, the savers are affected again with the loss of their real incomes. As Sri Lanka has reported the highest inflation rate in Asia during the last year, which is on an annual average over 46 per cent, nearly half of their incomes and savings have been already wiped out by high inflation.
The loss is much higher in terms of food inflation, which is approximately about two-thirds. This means that, someone’s Rs. 45,000 monthly income must be worth about Rs. 15,000 now due to higher food inflation. In fact, overwhelmingly a large proportion of Sri Lankan’s average income in general and elderly people’s savings incomes in particular, comprises spending on food.
Loss of savings
It’s the elderly who would experience the loss forever. When they reach old age and retire, they don’t go back to work. They would live with what they have worked for throughout their work during the past and, saved for retirement. This includes not only what they have saved personally, but also the pensions’ fund that they have accumulated in the past: For instance, the Employment Provident Fund (EPF) which has accumulated nearly Rs. 3,000 billion in assets.
Why does only the elderly lose forever? In fact, everybody loses as long as they earn rupee incomes. But the issue is that eventually all forms of earnings get adjusted to inflation, while all types of income earners also try to capture what they have lost through adjusting their earnings. As there would be no reduction in prices, in the long-term recovery path, everyone tries to raise their incomes to compensate for price increases.
Therefore, a person who earned Rs. 45,000 may be able to double or treble his income during the recovery path. Although the recovery takes many years, that person would be able to reach his pre-crisis real income level after 5 or 10 years. Accordingly, people would be able to capture what was lost sooner or later if they work for it.
But the irony is that this opportunity is not for people who have come to the end of their working age, the elderly. They have worked and saved, if they have done it at all, expecting to live the rest of their lives on savings. Since they are not intending to go back to work, what they have lost is lost forever!
Loss of demographic bonus
Countries with ageing populations also experience an economic advantage of their population change, called “demographic bonus”. It’s the increase in the share of working age category of population. The decline in historically higher fertility rates and the increase in modern life expectancy are the underlying causes of the so-called demographic bonus.
As we all know, Sri Lanka is a fast-ageing society like the Western countries, due to its unique historical demographic transition which is quite different from other South Asian countries. It’s the era of demographic bonus for Sri Lanka for about 35 years which we started since the turn of the century. In fact, now the country is in its latter part only so that in another 10 – 15 years’ time, Sri Lanka’s demographic bonus would come to an end.
Demographic bonus is important for accelerating economic growth, because it can generate extraordinary income growth due to increased share of working people in the population. The sad reality is that in the middle of our demographic bonus years, we are caught up in an economic crisis!
In general, Sri Lanka missed the advantage of its demographic bonus due to the lack of opportunities to employ the working-age people. During the past 20 years, many of the working-age people in Sri Lanka had to waste their productive capacity occupying themselves in unproductive sectors, including domestic agriculture, public sector and some other self-employed activities as well as leaving the country for foreign employment.
Growing share of elderly
Then the country is hit by the crisis, under which even part of the available economic activities and opportunities got contracted. The government too had to lower the retirement age as the public sector was too large for the government budget. The country started experiencing, not the demographic bonus, but the demographic burden of the population.
In fact, the countries could expand the years of enjoying the demographic bonus further to accelerate development by extending the retirement age. But in the middle of the crisis, Sri Lanka must lay off its working people and, work for its gradual recovery for the rest of the period keeping the demographic bonus aside.
What comes after the years of demographic bonus is the period of an increased share of the elderly population. Accordingly, Sri Lanka is entering this era with an increasing share of elderly people, whose savings got wiped out by the crisis and who need to be taken care of by the economy.
People would often ask the question, “when would the crisis end?” I know what many of them mean by that question is when would we return to our pre-crisis living standards that we managed those days. As prices would not fall back, even if the inflation rate comes down to single-digit level, we have to live with the future price structures.
The only way that Sri Lanka can return to pre-crisis living standards is through improving their incomes. It may not happen overnight, as it requires restoring the economic activities and facilitating the enabling environment for them to grow. Although the collapse was instant, the crises build up slowly. In the same way, the recovery is also a slow process over time, but even for that we need to act fast.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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