As of today, it is no secret that we, as a society and a country, are grappled with recession. With a population of 22 million and an external debt stock of US $ 69 billion, we are experiencing a steep increase in prices of goods and services.
Apart from the living cost, the livelihoods of the people are threatened by the taxes already imposed and by some of the measures in the proposed tax bill. Although the government’s intention to prop up the coffers is welcomed by the masses, its impact will cripple the once thriving Sri Lankan middle class for good.
When you live a certain lifestyle, you get accustomed to it; the main factor that shapes one’s way of life is the income. When the purchasing power depreciates, due to the increasing costs, people invariably cut off their consumption patterns. Without a doubt, it’s going to be hard and all of us might hate it but eventually, we must adapt to this new reality.
Those who were used to come to work in a personal vehicle are shifting to public means or travel as teams by dividing the expenses. If you went on vacations twice or thrice a year, now you got to cut back. People took pleasure in eating imported fruits, vegetables, chocolates, cheeses and many more luxuries – no more.
The most severe blow came with the drastic slide of the LKR. The loss of the value of our currency against the strengthening US dollar has halved the true value of provident and savings funds, which took years and years to build. Most of the pensioners, after 30-35 years of service, are hopeless and feel abandoned since they have no other ways to see through the rest of the years, after having such dignifying careers.
Another area to watch out for is the ‘foodflation’ i.e. food inflation. At the moment, the Central Bank of Sri Lanka (CBSL) states that the headline inflation is at 70 percent and from a simple observation, we know that the general prices of food have exceeded the 100 percent mark. Both these indicators will rise more before coming down.
Most of the people in the middle class are concentrated to the urban and semi urban geographical locations. The land prices and the housing market in these areas have been in an increasing trend and apart from the space taken for the home, the area left to cultivation is very minimal. Often three or four vegetable varieties are grown in pots.
Why SL government should focus on well-being of middle class
A simple fact is that they contribute more to the national economy. In the government and private sector, this group can be considered as the brain. In many aspects, this is true. The education level, ability to innovate, the grit and passion to succeed, higher state of financial literacy and ICT literacy have created companies, conglomerates most of all millions of jobs as small and medium-scale entrepreneurs.
Also, this stratum has the greatest number of direct taxpayers. Therefore, it is pivotal for any government in any country to articulate financial and fiscal policies based upon its middle class, especially at a time of economic discomfort like what we are experiencing now. One other significance of this class is that they tend to believe the formal financial system and banks. These people come to the banks for their financial needs. For loan facilities (housing, personal, working capital, pension, business and, etc.), for leases, current accounts, savings accounts, foreign exchange savings accounts and LCs, to fulfil many more needs.
Such confidence in the system helps to maintain its stability, to ensure the positive growth and profit earning motive through providing accurate and efficient services using new technologies, which are on a par with the world. Since all of these transactions are happening in the grid, the government and CBSL are able to extract data in developing policies. Because of the economic crisis, most of the professionals in this category are leaving the country. There’s a huge demand for skilled labour in the likes of information technology and sadly most have fled already.
Middle class was at the centre for most of economic revivals in the modern world. In 2015, there were three billion in the middle class and had spent US $ 33 trillion, which is two-thirds of the global consumption expenditure.
Let us see what happened in China. In 2000, the middle class was only 3 percent of its population, that’s 39.1 million. In 2018, the figure exceeded half of the population, 50.8 percent, up to 707 million. The globally accepted standard for the middle class is people who can spend US $ 10 to US $ 50 per day (per annum US $ 3,650-US $ 18,250).
To make a comparison with other nations in the same time period that had an increasing middle class, Russia 28.2 percent to 71.5 percent, 62 million people (the only country in Europe to post such high level), Brazil 30.3 percent to 51.4 percent, 54.8 million people and in India 1.2 percent to 5.7 percent, 64.8 million people.
Beginning of the Sri Lankan middle class dates back to 1970s, when the economy was opened to the world. Since then, with the expansion of the economy and the per capita income, the middle section grew. With increasing disposable income, people were demanding for modern homes, personal vehicle, secondary and tertiary education for children, food with higher nutrition, for entertainment, etc.
A study by the Institute for Professional Studies (IPS) reveals that the number of people entering the middle class per year in average is about 30,000 people. But with the drop in GDP and per capita income (PCI), the middle class has been getting thinner since 2018. PCI in 2021 is US $ 3,815, a 3.27 percent growth versus 2020. In 2019, the PCI was US $ 3,858 and in 2018, it was US $ 4,059. The International Monetary Fund (IMF) has forecasted Sri Lanka economy to shrink by 9.2 percent; consequently, a fraction of the middle class will sink to poor section.
With the technological advancements in internet and transportation mediums, the world has become one city (globalisation) and we are part of it. As a result, we do feel the vibrations of the world, no matter how far we are from them. On the one hand, the Sri Lankan economic crisis can be identified as a consequence of the global economic collapse. We can find two main reasons to this downturn; one is the Russia-Ukraine war and sky rocketing global energy prices. The other is the Zero Covid Policy (ZCP) implemented by the Chinese government to contain the spread of COVID-19. The ZEP has closed down provinces of China, with its mass manufacturing hubs creating disturbances to the global supply chains. The demand has exceeded supply, thus increasing the prices. Amid all the constraints, the IMF has slashed its forecasts for global economic growth for 2022 and 2023, in order 3.2 percent and 2.7 percent. With an economy, which is contracting by 9.2 percent, this is just bad news.
In a macroeconomic point of view, savings are defined as the balance when we subtract expenses from the income at a specific time period. For a country, these personal savings and tax money play a major role in clearing government expenditure. With the proposed tax bill and all the hype built into it have made the topic red hot. Let us discuss the issue in detail.
The Nobel laureate Milton Friedman made the following remarks in 1978 on fiscal policy and savings. They were cited by former CBSL Deputy Governor Dr. W.A. Wijewardena, in his article series on Sri Lankan economy in a leading newspaper in Sri Lanka.
“Tax burden falling on people is not what they pay as taxes to the government out of their incomes. It is the total expenditure of the government. Part of that expenditure is financed out of the current revenue. We know higher these taxes, higher the tax burden falling on people. However, if the government runs a deficit, that deficit is normally financed by borrowing. When the government borrows from the domestic sources, money saved by people is transferred from the savers to the government. Since it is those savers who make a sacrifice in the form of foregoing what they could do today, we believe that it is those savers who bear the burden of government’s current borrowing. However, that borrowing should be repaid by the government with interest by taxing us in the future.”
If the government to reduce taxes on its citizens, the government will have to refinance its debt but it can only be done up to a certain extent. There’ll be a day they cannot borrow any more. By postponing tax payments to future, we will have to pay more taxes when it comes due. It’ll be a death blow to our middle class, given the perilous situation of the economy. Yet, they have to put the shoulder to the wheel. In order to get their consent, the governments will have to reduce expenditure and rampant corruption.
In the current inflationary pressure, it is a challenge to retain the true value of your investment. Therefore, look for higher returns with safety. Do not go after pyramid investments, which promise higher returns. Always remember, if such investments do promise higher returns than the formal financial institutes, then for sure it is a scam.
With the National Savings Bank, your money and the interest is 100 percent safe.
