Fonavi: The consequences of the return of contributions on the Peruvian economy

On April 7, the plenary of Congress insistently approved the autograph of law, observed by the Executive, which guarantees compliance with the refoulement of the money of the workers who contributed to Fonavi. It provides that priority be given to the vulnerable population as a result of the COVID-19 pandemic.

It was adopted with 101 votes in favour, with no vote against or abstentions. The autograph aims at the immediate implementation of Law 31173, which already guaranteed compliance with the rule for the return of Fonavi to workers who contributed to the fund.

However, this rule raises many questions, especially about how the disbursement would take place and with what money, since the fund was repealed in 2004.

This refund means a sum of S/ 42 billion 8 million soles, which, according to economist and political analyst Miguel Santillana, would have to come out of the Government's budget, of S/ 185 billion. “It is impossible for the Peruvian State to assume that without it having to go into debt to pay,” he says.

“This is an extraordinary expense that no one had foreseen. That is, apart from breaking the budget, you would have to go into debt, cut the items to (other ministries) to be able to pay these gentlemen, which doesn't make sense,” adds the economist.

Arguments for observing it:

As mentioned, the Executive Branch had observed this law autograph, claiming that Congress has no spending initiative. This refers to the fact that the legislature cannot “create or increase public expenditure, except in terms of its budget”, according to the Constitution. Nor can it “approve taxes for predetermined purposes, except at the request of the Executive Branch.”

They also argued that the final amount is six times more than the S/ 6,684 million that Fonavi raised, it represents about 21% of the Public Sector Budget and about 71% of social spending on Health and Education by 2022.

So, is the measure feasible?

“That is pure populism. There is no way that a government, no matter if it is right or left, will pay this bill. What I would have to do is return the money to the employer, to the employee. I would have to give back to each company that contributed to the Fonavi account, which cannot be, either,” Santillana said.

WHAT WOULD HAPPEN IN THE NEXT FEW MONTHS?

The final amount is S/ 42,008 million soles in favor of contributors, considering the consumer price index (CPI) and both employee and employer contributions. Then, the immediate return will go from S/420 to S/700, for the 1.8 million phonavistas. A National Register of Beneficiary Fonavistas has been created and other steps to be taken to achieve this return.

“It's a chimera. The phonavists were calculating roughly 12,000 soles per head, those expectations are generated by people. But that is unrealizable. Whether it is a government of the left or the right, that is unpayable and even worse in a state like the current one, which is spending excessively,” says the expert.

Santillana argues that this payment could not come at a worse time, since the country's fiscal balance (balance between revenues and expenditures of a nation) had already been “broken” since the term of office of former President Ollanta Humala.

“Supposedly, we were going to fix it so as not to exceed 2% of the deficit, but with the current situation, forget it. (They wanted to) go back to 2%, and that's what (Pedro) Francke boasted about. He managed to lower the deficit because companies paid extraordinary taxes and mining had a great year, not because of his achievement. He hasn't solved anything,” he said.

WHAT IS FONAVI?

The Fonavi, the Social Interest Housing Fund, was installed by former President Francisco Morales Bermudez in 1979. This consisted of a contribution of the worker's salary and a contribution from the employer. The purpose was that, every year, housing would be raffled among the contributors.

The money began to be used in 1990, by President Alberto Fujimori, to manage the fiscal agenda. In the year 98, it was renamed the Extraordinary Solidarity Tax and in 2004 it was repealed.

S/ 3.2 billion soles would have been collected. In 2008, a commission was created for the return of these contributions and it was discovered that around S/ 10 billion soles had disappeared. This amount corresponded to what was used in the 1990s, to pay for the economic adjustment.

ANALYSIS OF THE COUNTRY'S ECONOMY AND MANAGEMENT OF OSCAR GRAHAM

Miguel Santillana sees weak leadership in the current Minister of Economy, Oscar Graham. So much so that he compared it to Alan Garcia's first term.

“It's incredible that right under their noses they have taken a 10% increase in the minimum wage, without the opinion of the MEF, and all these things that politicians are doing, how to remove (IGV) from food. I wonder, and how are we going to pay for that? Where will the money come from to pay for that? If you are blocking dollar-generating companies (extractive industries and agro-industries),” he concludes.

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