Does the depreciation of the rupee undermine the value of the Provident Fund?

 By R.M.B Senanayake

Fears are expressed by trade unionists that the depreciation of the external value of the rupee in terms of the US Dollar constitutes a threat to the value of the Employees’ Provident Fund. 

The EPF is a rupee fund and contributions to it are in rupees deducted from members. Of course although the nominal value of the rupee does not change, its real value or purchasing power changes over time. The real value of the rupee has depreciated in the sense that the purchasing power of a rupee has continued to fall over time for the last 40 years or more. The trade unions have at last woken up to this fact. 

But the remedy is to attend to its fundamental cause. The fundamental cause for the depreciation of the rupee (except in the very recent case of President Trump’s unilateral action) is the current account deficits we run in our balance of payments where we import twice as much as we import. This is made possible only because of the continual budget deficits of the Government funded by borrowings from the banks.

We have run budget deficits for the last 50 years and after 1977 we have funded them more and more from borrowings from the banking system which is new money creation. Such money creation has increased along with the increase in the magnitude of the budget deficits. 

A country with high propensity to import running current account deficits not covered by inward foreign capital inflows will inevitably face such depletion of foreign exchange reserves. But a certain minimum foreign reserve is essential for when foreign reserves are exhausted the country can no longer pay for its net imports (exports minus imports) and won’t be able to import at all unless foreign buyers give credit which can never be unlimited or forever. During World War II we accumulated large foreign reserves which we could not spend because of shipping difficulties and also because they exceeded our import needs.

Of course the depreciation of the rupee reduces the purchasing power of the rupee and this is what concerns the trade unions. The trade unions must insist that the Government stop money creation by borrowings from the banking system. Under the pretext of the need for temporary lending until the tax revenue is collected, the Central Bank has funded money creation. All Central Bank lending to the Government should in my view be banned to stop this evasion. Let the Government time its expenditure to its revenue collection.