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Sri Lanka should refund Rs500bn in EPF money holders after Covid-19 crisis: Cabraal

ECONOMYNEXT – Sri Lanka should return about 20 percent of Employees Provident Fund balance to holders after the Coronavirus pandemic ends as the island no longer had fiscal space to boost the economy after recent tax cuts, a top official said.

Sri Lanka had already given a ‘stimulus’ in the form of a tax cut in January and a debt moratorium after the new administration came to power.

The island did have the fiscal space to give the tax refunds and grants announced by advanced nations, Senior Advisor to the Finance Minister Mahinda Rajapaksa, Nivard Cabraal said. He was also a former central bank governor.

He suggests that 20 percent of each members EPF balances be returned, which will be 500 billion out of a total of 2500 billion in assets.

“This simple and uncomplicated return of capital could be a useful and viable alternative that could achieve the same outcome of serving as an economic stimulus, without any fiscal burden being placed on the Government,” Cabraal said.

“In addition, this newly created “equity” in the hands of around 2,500,000 individuals 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 be circulating amongst millions of people, many other “knock-on” benefits would also accrue to the people and the economy.”

Cabraal says the benefit would be as follows:

Among such benefits would be:

(1) enhanced economic growth being recorded in the economy due to the higher investment and consumption as a result of the funds infusion.

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(2) many persons being able to settle their high interest debt which is presently crippling them.

(3) new business ventures being created as a result of persons with entrepreneurial ideas and abilities being able to embark on new business ventures.

(4) more opportunities opening out for the financial sector to lend, since persons who are 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) Government tax revenues improving due to the rise of the level of economic activity throughout the economy.

The funds of the EPF are now held mostly in Sri Lanka government bonds. It is not clear what the effect will be if attempts were made to liquidate bonds.

Meanwhile Sri Lanka’s soft-peg with the rupee had come under severe pressure after a large liquidity injections were made by the Central Bank were made and premiums in the swap markets have disappeared. (Colombo/Mar29/2020)