Let’s assume a certain bank has deposits of Ugx 10 billion. That bank will perhaps keep 1% in liquid Assets (cash that can be quickly be given to their customers who demand it).
Therefore, out of Ugx 10b, the bank will have the liquidity ratio of 1%.Therefore if customers asked Ugx 100m to be withdrawn, the bank would do it. However once customers require more cash, it faces the problem.
What banks do is that they lend out deposits to other people. This is how they make profits. They pay you 2% a year to save money, then they lend to someone else at a charge of 7%. They do this because usually people don’t want to suddenly withdraw their money and it’s more profitable than simply keeping it on shelves.
Come in the National Social Security Fund. The fund is not a bank but its operations and mandate is to protect and cover the individuals as prescribed by law.
Now there is Ugx 2.5 trillion proposed to bail out Nssf customers affected by the Covid-19 pandemic financial stress. This would be a rational decision if the fund managers decide to temper with its securities and bonds. This comes with high opportunity costs because they are always fixed. Worse still in case Nssf fail to meet their financial obligations with their contractors, this may lead to protracted legal suits which may throw the fund in a deeper ditch.
In the same vein, the available Ugx 125b contigent fund which is approximately just 5% of the needed 20% for settlement is too meagre hence making it a drop in the ocean, coupled with uncertainty for the fund to collect their monthly Ugx 100b from clients given Covid-19’s great impact on businesses thereby putting the funds liquidity in a dire situation.
The fact of the matter is that the moment nssf management starts to walk that journey of abrupt payment of Ugx 2.5 trillion, business will not be as usual, the fund may stagger and at the end lead to devastating impact to the economy as the country’s social security will be trumpled upon hence causing misery to ordinary citizen as there will not be any hope for people who sacrifice to provide labour for this nation.
There will be despair as worker’s will not be having nowhere to go to when they want probably their retirement benefits after clocking 50 or 55 years.
It is therefore important for the proposers of mid term payment to workers to sit down and weigh other options instead of deciding to eat the egg and miss the chicken!
The writer is an optimistic economist, and secretary General of Uganda Poor youth Movement.
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