It is a matter of interest that some people want to raise interest rates | Daily News

It is a matter of interest that some people want to raise interest rates

A subtle campaign has been in progress, asking that interest rates be raised because a low-interest regime under Central Bank guidance is supposed to “discourage the savings habit.”

Those who say this seem to not know that life is full of paradoxes. Well, this article is not a lesson in philosophy, but yes, life is full of paradoxes and perhaps modern life is a paradox per se.

In that vein, it may sound bad that savings and the savings habit does not necessarily a good economy make. Savers save, and that’s all well and good. But spenders spend, and that’s when everybody makes money. Shouldn’t that be elementary, my dear Watson?

However, pundits claim that the current Government policy of low interest rates is not only an “interest on savings” that discourages savers, but is also some sort of fetter placed on the economy. Certainly, the downside of low interest rates may be that those who save money in bank deposits do not get a good return on their investment. It has been argued that senior citizens are badly hit.

But is that good enough a reason to raise interest rates? Isn’t it something akin to saying children should ‘only study and not play’ because research shows that those who study do better in later life? But all forms of levity and frivolity aside, is any economist serious when he says that the interest rates should be raised, just because senior citizens would be better off?

Robust economy

Don’t we all love our senior citizens? But don’t we equally love all our citizens? An all-round robust economy is more likely at this time, with low interest rates and less taxes. That should be axiomatic, but why is it not? Good monetary policy entailing reduced interest rates is technically known as a stimulus — and even so, the critics say that this stimulus is bad. It is curious they use the term stimulus, and yet contend that this kind of monetary policy is hurting the economy.

Wait. A stimulus we are told is bad for the economy when there was a period of economic inactivity due to a pandemic? A stimulus? A stimulus is what every economy has been doing post-pandemic. Countries that have the wherewithal have spent obscene amounts of money on stimulus packages and we without that kind of kitty have resorted to a flexible monetary policy — a stimulus — and that is supposed to be bad for the economy?

Low returns on savings and the cheap loans that it made possible accounted for China’s spectacular growth. Go check the facts on that, and you would see this fact is incontrovertible. If the second largest economy on Earth was powered by low interest rates, that is supposed to be ‘financial repression’ and bad for the economy?

Risk taking

It is certainly one means of reducing Government debt because the State can borrow cheap and then it means that there are some other spinoff effects, but how does that compare with the fact that there is cheaper borrowing all round, which means that from everything from small business to private individuals there would be bigger risk taking, and the establishment of more business enterprise, etc., that would get the economy moving? More jobs would be a corollary, and that too means more money in people’s pockets and more spending.

To say that this policy would be unfair to the senior citizens and cite that essentially as the reason to raise interest rates is one-track vision. Senior citizens are one demographic, but could the rest of the economy be stagnated because the senior citizens should get more on their returns? There are better ways of looking after senior citizens while keeping the economy in good trim. There is already a special interest rate for senior citizens and it is not as if any of the critics are unaware of this.

This does not mean that low interest rates should be an all-weather phenomenon. It all depends on which stage the economy is in, and that is commonsensical. The point is the Sri Lankan economy needs a stimulus as do many other economies in the world, and that bears repetition. Bhutan, Brazil, Cambodia, China, Croatia, Cyprus, Czech Republic, Egypt, Fiji, Honduras, Iceland, India, Jordan, Kenya, Kuwait, Laos, Lebanon, Malaysia, Mexico and Nigeria were all countries which adjusted monetary policy and slashed interest rates, post pandemic, and this is to take countries up to ‘N’ only in alphabetical order, for the sake of convenience — and also ignoring some of the smaller economies which took similar measures.

Are all these countries treating their senior citizens badly? There is almost no country in the world which has not implemented debt moratoriums, and other policies such as non-collateralized loans and easing of regulatory oversight over lending, etc., as measures dealing with the pandemic. It is a universal phenomenon and it has followed that the vast majority of countries have decreased their interest rates, which is of course basic economics when economies are in dire need of a stimulus in the face of Covid.

But yet, there are geniuses in Sri Lanka who are suggesting that interest rates be increased or that it is bad policy to lower interest rates because senior citizens are adversely hit?

To take a random country, Netherlands announced that commercial banks might exceed the debt service ratio (37 percent), to a maximum of 50 percent. It makes it that much easier to secure a loan from a bank in that country.

Easy credit

There are a slew of measures that were taken in countries both rich and poor that were similarly weighted towards providing easy credit — and to even suggest going the other way and increasing interest rates at this moment in time is rather astounding. Of course we need to come back to that philosophical judgement about life’s paradoxes. Saving is supposed to be prudent and that is dinned into folks from the time they are kids. But yet, risk takers have always been rewarded more than savers, and basically all business is risk taking, and there are no prizes for guessing why businessmen are richer than your average saver.

The idea is of course not to make businessmen rich (!) but to encourage risk taking, i.e., making use of bank credit, so that jobs may be created, when businesses grow, and there is more liquidity in the system — all rather axiomatic.

It is what is needed at this stage of the economy, and even in China, after years of low interest rates — pre-pandemic that is — the interest rates were finally raised, again because that needs to be done at a certain stage of the economy, so that saving is encouraged too. Of course it is one dimensional to look at slashing interest rates as Government policy aimed entirely at reducing Government debt, and underscoring the “financial repression” theory. The chief policy objective in decreasing interest rates, needless to say, is to encourage private sector borrowing in order to stimulate a badly hit economy — in the present case, a post-pandemic economy.

These issues are clear as night follows day, and really, to encourage Sri Lanka to go in the opposite direction to most economies post-pandemic, makes zero sense. What is the rationale for it? That Sri Lanka is unique, and we do not support our business and small-business during a pandemic?

To bring the interest rates back up when the country is gradually inching forward in post-pandemic recovery is an act of masochism. No economy should beat itself up that bad trying to be conscientious about ‘saving’. Encouraging spending more than savings now, does not make us a country of wastrels. It makes us a country of responsible citizens willing to put shoulder to the wheel in a time of an extraordinary crisis.