EDITORIAL - The 12% mystery!

he Budget 2015 was everyone’s ‘darling’. It seemed to have brought a bag full of goodies with something for everyone. It also tried to address a serious issue faced by pensioners and senior citizens in the country.  The interests they had been receiving for their savings and fixed deposits had dropped drastically as a result of the Central Bank’s monetary policies. It is no secret that since Sri Lanka doesn’t have an investment culture as such, most pensioners depend on the interest income a bank or a finance company pays on their deposits. It is also no secret that pensioners and senior citizens are a force to reckon with, particularly when a crucial election is just around the corner.

Probably considering these facts, the Budget 2015 proposes to provide a 12 per cent guaranteed interest rate for deposits by the elderly -- age limit is yet to be defined -- from state banks. To facilitate this process, it was proposed that these state banks will be issued Rs.30 billion worth of Treasury bonds next year at a 12 per cent rate of interest.

Before discussing the peculiar or convoluted nature of this budget proposal, it must be noted that it is still a mystery how the Treasury arrived at this percentage and the value of the bonds to be issued. Why exactly 12 per cent and why exactly Rs.30 billion? We hope somebody would answer or enlighten us on these questions.

 Now let’s try to dissect this budget proposal under three key factors. If the inflation is as low as the Census and Statistics Department and the Central Bank say it is, why give elderly people more than double the interest rate a normal person gets for his or her deposit? According to the latest inflation figures released by the Census and Statistics Department, inflation in October was as low as 1.6 per cent.     

                                                                   
The inflation figure throughout the year has been in the mid-single-digit range. Hence if inflation is at 1.6 percent, an elderly person should not mind getting a six or seven per cent rate of interest on his deposit because low inflation would allow him to purchase the same amount of goods and services despite the drop in interest rates. Besides, in the current scenario, senior citizens get one per cent more when compared with what an average person gets. Therefore, it indirectly suggests that the real rate of inflation is much higher than what was published by the Census and Statistics Department.

Secondly, selective arrangements like this tend to create chaos and confusion within the system.  The immediate result is -- if the proposal is implemented as haphazardly or superficially outlined in the budget speech -- there will be a deposit flight from private banks to those state banks that pay a 12 per cent interest rate to senior citizens for their deposits. If the private banks are keen to avoid such a development, they will also have to pay a 12 per cent interest rate notwithstanding any Treasury bonds from the government. Meanwhile, the finance companies, which generally pay higher interest rates when compared with the banks, will have to match the figures despite policy interest rates remaining at multi-year lows. Therefore it is clear that such a situation will result in chaos and distortions in the country’s financial system.

 Thirdly, this kind of selective arrangement is prone to abuse. It is clear that the authorities are not going to implement this budget proposal because it’s impractical to do so. But even if it is implemented with certain reservations and amendments to the original proposal, people will find ways to abuse it.
 We hope that the relevant authorities will have solid answers and solutions for the issues we have pointed out, as it is evident that the senior citizens in the country are struggling to make ends meet and barely survive amid the soaring
cost of living.