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Discussing the impact of bi-monthly payments

Economists are anticipating the expected benefits to public officers and the economy as government implements its bi-monthly payment policy as of today.

Beginning today, public officers and government pensioners were expected to receive half of their salaries and pensions with the remainder to be paid in the next two weeks.

Economist Dr Curlan Gilchrist labelled the move as “great” and one “that was easy to do” in the digital era as payrolls are no longer being generated manually.

“It’s a good decision that should have been taken before,” he said on The Bubb Report, adding that this mode of payment will see an increase in the circulation of money and of economic activity.

Dr Gilchrist further noted that while “it’s the same salary simply split in two, [we will see] the circulation of money injected into the economy [and] money has a way of multiplying [so] we will see the multiplying effect.”

In addition, he said “from an economic, strategic perspective, I support the move…I think the employee/consumer will adjust, we should see some positive impacts in terms of the increase in economic activity throughout the months.”

Public Policy Advisor Dr Stephen Fletcher, who also supports the initiative, described it as “fantastic, a game changer especially for the rural economy.” He cites the “mass circulation of money in the economy and increasing the multiplier effect of monies as it circulates.” Adding that it is “likely to impact on the growth of the economy.”

Noting that it will impact loan payments, Dr Fletcher explained that bi-monthly payments can result in savings on the overall interest of the loan.

Prime Minister Hon Dickon Mitchell, speaking to the benefits of getting paid twice per month at a recent briefing, said this policy allows workers to have cash “in a far shorter period of time to meet financial commitments” and for those with loans, “the faster you pay your loan, the more interest you save and it helps with the management of one’s cash flow, which is critical to personal finances and economic activity.”

Entrepreneur Christopher De Allie, who was also a guest on the programme, said he is yet to understand the impact on loan payments as his conversations with financial institutions is that “if you have a loan payment of $1,000 per month…most of it goes to interest up front, that is how the bank takes off their payments and a very small portion goes to the principal. If you want to reduce the interest payment on the loan, you have to put more of it to the principal than the interest, so as the principal reduces, the interest charge on the principal will reduce. That is the only way you can get a savings.”

One local finance executive, who wished not to be named, explained that the bi-monthly payments applied to mortgages and other loans will result in an interest saving over the life of the loan. The individual noted that a mortgage accrues interest daily so if your interest and principal payments are applied bi-monthly the lender accrues and pays interest at shorter intervals. Moreover, the business analyst noted that “this savings is not as significant as it would be if the pay cycle was bi-weekly and the mortgage payment is made bi-weekly.”

Further, the executive stated that bi-monthly payments allow for better personal budgeting and cash flow management so one may be able to add an extra principal payment on their mortgage. Providing an example, the finance executive shared that a mortgage loan of $450,000 at 5% for 30 years will result in total interest payments of $419,651.03. If the lender adds $50 extra towards the principal, that is, $25 bi-monthly, the total interest paid will be $396,210.56 (saving $23,440.47) and the mortgage is paid-off in 28 years.

Speaking of the benefits of a bi-monthly pay cycle for the economy, the business executive shared that it increases money velocity – the speed at which money is utilised for day-to-day transactions, in which a high money velocity is associated with an expanding and developing economies. The executive noted that on a monthly pay cycle, there’s a spending spike only 12 times per year but with bi-monthly that spending spike happens 24 times per year. “So, it will increase economic activity, which is what drives economic growth.”

Businesses, the analyst noted that will now see a faster stock turnover resulting in them having to order stock more frequently.

For employees, the finance executive said it enables better money management “as it forces people to think intelligently about how they spend money and use their disposable income.” It will allow people more comfort “of not having to worry of having a lack of income to meet unexpected expenses during the month.”

In addition, the business executive said it will help individuals to be confident about saving because there’s the assurance that when monies run low, the next pay day is just a few days away.

Commenting on the expected increase in the circulation of cash, De Allie expressed that he is not yet convinced that there will be much more money in circulation as bi-monthly payments are already in place in some businesses within the private sector and the employees spend accordingly, so “that is left to be seen.”

De Allie, who represented the private sector in the Senate for several years, noted that bi-monthly payments can impact Government’s cash flow as government’s main revenue stream is from taxes, and “if those taxes take a hit in any form, then there will be constraints.” He explained that since government’s first priority is to salaries and wages, suppliers from the private sector who government has to pay for products and services, “will suffer.”

“So, it will be of interest to see how that will work out and if there will be any constraints at all based on how the cash flow operates,” he said.

Stating that he however doesn’t oppose the initiative, De Allie said he is concerned about the financial literacy aspect as “if you can’t manage your money, you would not be any better off in terms of what happens.”

During the first week of this month, the government commenced financial literacy sessions with workers and pensioners who will be impacted.

Public relations officer of the Public Workers Union (PWU) Diasy Hazzard, addressing this issue on another current affairs programme – the Narrative, expressed that the union is pleased that government has responded to their suggestion for such sessions. She stressed that education is important as money management remains a challenge even in adulthood for many people.

The PRO however expressed disappointment that government made the announcement about the fortnight payments without consultation with the unions, noting that neither the union or workers called for bi-monthly payments. She argued that “there is no benefit for workers but the private sector who has goods and services to offer because the salary remains the same.”

Therefore, she said “we appeal to Government, where you are taking measures that supposed to benefit workers, don’t bring it as a prescription, we are not your children, we are workers in this country. The government is not to rule people but to government the state of affairs of a country.”

According to the Permanent Secretary in the Ministry of Finance, Mike Sylvester, consultation with stakeholders including financial institutions and unions, commenced in February and the institutions are prepared to receive the bi-monthly payment, which will be made on the 15th and 30th of each month. When these dates fall on a weekend or public holiday, payments will be made on the working day prior to those dates.

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