13 Oct 2022 - {{hitsCtrl.values.hits}}
Almost every single day, economists and laymen alike hear the words ‘economic crisis’ and the technical jargon that they accompany such as ‘inflation rate, debt restructuring, austerity measures and fiscal policy.
Not only do these words cause a lot of confusion but also promises high stress to people of this island who have had to make significant changes to their lives, thanks to this economic crisis. Whatever, let’s ask ourselves an easier question “how do we manage our money in this economy”
We may wonder whether it is better to save or spend, and if money still holds its value. Further, various prudent money management tactics will not only help you, but it will help our economy grow. After the Aragalaya people have constantly been keen on being involved in being part of tangible change in the country. We believe money management from an individual level will itself have a crucial impact on the growth of our economy, as the key driver of any economy is its people.
Before understanding how to manage money, let’s look at the Sri Lankan economy in a nutshell, as explained by Professor H. M. Nihal Hennanayake Head of Department of Business Economics, Faculty of Management and Finance, University of Colombo,
“Sri Lanka is a small 82 billion dollar economy. Our economy is heavily dependent on foreign nations for its economic growth. An array of factors has contributed to the crisis, and symptoms of the crisis were clearly seen in 2020.
Even though all these symptoms were shown to the policy makers they did not take those symptoms seriously. The crisis therefore, as clearly corroborated by the IMF officials was due to mismanagement of the economy.
We have led our macro-economic astray. Many blame the crisis by stating it is due to: Covid-19, Russia Ukraine war, Easter attacks. But it is simply a façade, and the true culprit is mismanagement and corruption.
These incidents may have aggravated the situations but the symptoms of the crisis have been there all along,” he said.
He also emphasized the dollar crisis as a contributing factor to the demise of the economy, “Sri Lanka also earns dollars from a few sources: traditional agricultural exports, tourism and foreign remittances. In the last few decades we have not diversified the dollar earning sectors.
Further, he stated some key factors that contributed to the crisis, “Sri Lanka after opening the economy after 1978, were importing more than double of its exports. Our import dependent economy has been consistent throughout the decades. Also Sri Lanka suffers from a large savings and investment gap. Sri Lanka showed a growing economy after the civil war ended in 2009, where there was an emerging construction bubble; we spent substantial amounts of money on infrastructure development of the country. Though needed, it was implemented upon loans which we did not prudently pre-plan how to pay back. Now we are in a situation where we do not know how to repay the loans. Another contributing factor to the crisis is the high tax cuts after the 2019 elections, which reduced 1/3 of government revenue.”
Hence, large economic mismanagement induced by corruption has led to the crisis. But, what we need to know now is what we can do as individuals to help ourselves and the economy.
We asked him, whether it is better to save or spend money considering the low value of money amidst hyperinflation.
He said, “People are constantly worried about the value and security of money, because of inflation. People are thinking whether to save the money or spend. As an economist we should consider both aspects of saving and spending”
Hence, he stated both aspects are important in spite of the value of money.
When considering savings he stated, “Controlling our consumption is important, as it will reduce aggregate demand for good or services which will help to control inflation. This will also help to reduce the interest rate as well. To accelerate the economy we cannot keep high interest rates as businessmen will find it difficult to invest.
However, though we had low interest rates before, our investments in the country were still low, hence in Sri Lanka the investment does not depend only on interest rate, but other factors as well (political stability and a conducive economic environment). Hence, saving is good for the economy as it will reduce inflation and in turn reduce cost of production and increase business competitiveness in the market.”
Hence, in a nutshell to increase future investment and reduce inflation, we need to save as a nation.
He also commented, on how people should spend money in addition to saving, “People must be thinking that they should spend as much money as quickly as possible, as the real value of money has dropped due to hyperinflation, as of September it was nearly 70%.
But from the perspective of an economist I suggest people spend money on non-liquid assets such as land, building, commercial crops, where they can secure the value of the money. On the other hand these types of investments will definitely help recover the economy.”
He stated that thoughtful spending should be balanced with savings. If people spend negligently it will definitely increase inflation and further deepen our crisis.
Other economists also commented on prudent money management practices during the crisis.
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Economist |
Saving or Spend |
Value of money |
Key money management tips |
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Asitha Pinnaduwa, 'Assistant Vice President in Private banking- at a leading commercial bank. |
Money is a utility that is intended to enhance our lives. Hence, despite the economic condition, whether we decide to save or spend, it has both positive and negative consequences. Spending - Consequently, there are a few instances in which an expensive product, service, or experience is justified (as long as you don't incur credit card debt as a result). Hence, there are certain areas in which we can afford to spend (wisely) irrespective of the economic cycle. Good health is a crown on the head of a well person that only a sick person can see. Hence obtaining a gym membership, start consuming organic food, periodical health checkups or hiring a fitness professional will only help you to make yourself better. As a result, you will spend less on costly medicine and consume fewer toxic foods and beverages. Saving - One of the most important aspects of accumulating wealth and securing one's financial future is "saving" money. The ability to save money provides a retreat from life's uncertainties and an opportunity to live a quality life. Systematically setting aside a sum of money will help you avoid many challenges and obstacles in life. There are numerous reasons to save, and such savings indicate that individuals are prepared for risks such as illness and unemployment, as well as for foreseeable events like education and retirement. Hence, despite the economic cycle we are in, we need to ensure we have adequate savings. Despite that, the Sri Lankan nation has not shown a very positive attitude towards saving. The 2021 Global Findex Financial Inclusion report published by the World Bank attests that 46 percent of Sri Lankans saved any money, of which only 34 percent saved money with a formal financial institution. Making matter worst since 2014 survey, there had been only 1 percent incremental growth from 45 percent. Overall saving and usage of a formal financial institution grew from 31 percent by barely a 3 percent. On other hand the global average of saving stands at 49 percent while Sri Lankas dominated ahead of it peer south Asian nations as their savings average stands at 23 percent. The habit of savings among the males and females stood as 49 and 43 percent respectively with a gap of 6 percent. The above numbers statistically discuss the Sri Lankans' lower attitude towards saving.
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Inflation is the increase in the prices of goods and services and the corresponding decline in the buying power of each Sri Lankan rupee. Inflation is one of the primary processes that diminish the purchasing power of money over time.
You must therefore choose investment options with returns that are greater than the rate of inflation. Not only can investing correctly help you overcome the challenge of inflation. |
Earning - Saving = Expenses Not the most widely used formula in Sri Lanka Earning - Expenses = Saving
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Mr. Rajishtha De Alwis Seneviratne, Senior Lecturer, at the Department of Business Economics, Faculty of Management and Finance, University of Colombo |
It is wise for people to be careful in their spending and rethink consumption patterns. For instance they can reduce consumption of imported goods and substitute with domestic goods or self-produced goods (Ex: fruits).
People can make simple changes in consumption, such as by changing food habits without compromising on nutrition. Also changes in commuting methods will reduce spending such as by using public transport, biking or walking. Though time may have to be compromised, there are both savings and health benefits.”
He also stated to consider reducing, reusing, and recycling. This will help with saving and the sustainable development of the economy. He said to use our resources to the maximum potential, void of exploitation, for instance if there is an unused land to use it for business, cultivation or rent purposes, and thus keep no asset, skill, resource idle. We can make one of our hobbies, such as cooking, sewing or music a supplementary business, which can increase our spending power. He also stated that patronizing small business will help the economy grow, and improve domestic production. This is a good consumption lifestyle change that we can do to help the country grow.
When considering saving methods, he stated to consider a savings portfolio, with liquid, non-liquid and financial assets respectively. Also it is good to create a savings habit. Maybe a small amount every month would be a good idea.
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Shiran Fernando Chief Economist at the Ceylon Chamber of Commerce (CCC) and leads the Economic Intelligence Unit |
A mix of both. With the high interest from deposits it is a good time to save in a 6-18-month horizon. The interest earned could assist in managing the expenses/spending as well. If the total spending of the economy by consumers reduces completely, then it would have a wider impact on different sectors of the economy which is not good.
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LKR is still valuable but from a dollar perspective with the depreciation prices in particular of imported goods are high. One of the main factors that would drive stability of prices and bring down inflation is improved confidence both among sellers and buyers. Non-liquid assets like land are generally good investments when inflation is high. Built houses or properties may command a premium at this point given the difficulty in finishing construction projects with cost escalations and shortages.
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