The price of a Malu Paan in 2020
In Sri Lanka the surest investment seems to be burying your money in the backyard or putting it on a plane. This month inflation is almost 20%. It seems that the government has gone completely apeshit and started financing debt with a credit card. I hope we get frequent flyer miles or something. Mahinda must be doing something fantastic to take food out of peoples mouths before they swallow. In 2005 the ‘average’ family spent Rs 4,286 per month. In 2006 that amount is about Rs 5,000. That is the concrete increase in the cost of living under this administration. What’s is more scary to me is that this rate of inflation unchecked makes any cash savings worthless, which makes me wonder how a person saves for marriage, children, education, or a midlife crisis. If there is even 15% annual inflation, it is still impossible to find a bank account that will even break even. You might as well buy gold and bury it in the backyard, which is what a lot of Sri Lankans do.
Loosely, ‘In mainstream economics, inflation is a rise in the general level of prices, as measured against some baseline of purchasing power (Wikipedia).’
Some inflation is actually good for an economy in that it means that ‘sticky’ wages get lowered naturally. And hence good for business. At rates like 10-20%, however, it literally robs money from working-class people and savings accounts. At that point it’s all bad scene.
Anyways, In Sri Lanka the purchasing power measure is “The CCPI [,] the countryâ€™s official cost of living component of the wages of both the government and private sector employees and to measure the rate of inflation (statistics.gov.lk).” All the stuff’s available at the Statistics site. It’s a pretty mundane measure, comparing the price of rent and food and all from one year to the next. Here’s what inflation has looked like (PDF),
Inflation looks like it’ll be 13% this year, up from 11.6% last year. That was also Mahinda/SLFP bullshit though, inflation has been below 10% since 1997, barring the war blip of 2001. Regardless of whatever lip-service and subsidies the government distributes to a few people, inflation robs from everybody. It basically means that the money you earn buys you less food. It means the money you save is worth less when you withdraw it.
In this case Mahinda is pretty directly responsible for inflation, increasing the size of government and borrowing 100 billion rupees (1 billion dollars, wtf) from the Central Bank. So, the government prints money to wipe its ass and we get the bill. Meanwhile, I get to see 100 billboards that I paid for while Mahinda’s convoy flicks me off in traffic. Fantastic.
Long Term Savings
Besides the daily cost of food and rent, inflation also effects the value of savings. Let’s say inflation is an average of 10% over ten years. If I put Rs 5,000 in the bank at 6% then I can collect Rs 9,000 in time. Which is cool. Because I saved I can now feed my family for an extra month. Or not.
By the time I withdraw the money it’ll cost 13,000 to take care of a family. So I’ve saved like my mother told me too and as a reward I get… less value than I put in. If I spent the money ten years ago I could’ve fed my family for a month. Now I can’t even do that. It’s not that saving doesn’t gain you money, you actually lose money with inflation this high. For every 6% that interest gives, inflation takes 10%. Or, for ever 6% the bank gives, the government takes 10%.
Long term cash savings are basically pointless in a country with this high a inflation. In the States (2.5%), Canada (1.9%) or India (5.5%) you can save some money at a modest return and count on being able to buy more stuff in the future, or at least the same amount. When the government is doling out subsidies, advertising itself, and keeping Ministers in the style to which they’re accustomed, however, inflation skyrockets. The most obvious culprit is when you print money you don’t have. That takes money directly from people’s futures to paper over the government’s short term cock-ups. The people who are hit the worst are pensioners and people on fixed incomes (like government employees).
Mainly, however, I am personally pissed cause there’s no incentive to save in Sri Lanka. If I just put my money into Loonies (Canadian Dollars) and bury them in my backyard I’ll have more money in 10 years than if I’d put Rupees in the bank. That means, as an individual, I have an incentive to take money out of the Sri Lankan economy entirely. Money in the bank is getting invested or something, but money in my backyard isn’t doing anything. It’s bad for the country, but good for the individual. That’s bad for everyone in the long-term.
Stocks: Stocks theoretically self-adjust for inflation cause they’re pegged at whatever people are willing to pay. However, rampant inflation suddenly means that a company revenue sheets are all fucked up. A company’s revenue rises with inflation, but they’re not creating any value for that dollar amount. It’s just air, but you can claim 20% growth without doing anything. As an investor it makes it harder to read annual reports, but I guess stock investors don’t get totally screwed by inflation.
Gold: Traditional Sri Lankan investment is gold and jewelery. A nice ‘fair girl with property and jewelery’ is still advertised in matrimonials. Gold effectively takes money out of circulation and it’s not especially good for national growth. However, in this messed up environment it makes for a sensible individual choice.
Foreign Currency: Then there is always the possibility of investing or saving abroad. This is another good option that’s also bad for the country.
This whole scene is bad because it all involves betting against the Rupee. If you don’t want to go down with the ship you either have to take your money out of the Sri Lankan economy, or directly invest in the private sector. The latter seems like a good option, but stocks aren’t something ‘average’ Sri Lankans are going to do. They’re going to contribute to EPF, maybe open a Bank of Ceylon account, and finally collect a pension that won’t buy them a boiled egg. All because the government spent their money and left them the words ‘Pro-Poor Development’ as a receipt. Try to cash that in 20 years.