The New Year must herald firm consensus on economic policies

New Economic Development Agenda to face impending crises

The New Year that has dawned is an opportune time for the unity government to come to a firm consensus on economic policies. The lack of a clear commitment to an agreed economic program and its effective execution has been a hallmark of the coalition government. Therefore Prime Minster Ranil Wickremesinghe’s proposal of an Economic Development Agenda for the next few years of the unity government is indispensable.

Incoherent economic policies and ineffective implementation have hampered economic stability and growth under the SirisenaWickremesinghe governance. Policy inconsistency and inability to implement policies have been among the factors for the economy being in a crisis. The Prime Minster and key ministers of the government recognise that the economy is at a juncture when it is vital for the government to arrive at an agreed economic program for the next two and a half years and execute its agreed economic policies effectively.

Economic Development Agenda

In this context, Prime Minster Wickremesinghe is expected to present President Sirisena with an Economic Development Agenda for the coming years. This Agenda is expected to be based on discussions with the World Bank, the IMF, and the Centre for International Development at Harvard University and the private sector. It is expected to arrive at an agreement on an economic strategy to resolve the country’s economic crisis and determine a strategy to manage the domestic component of the public debt next year and the large repayment of foreign debt in 2017 and 2018. Fiscal consolidation and policies to attract foreign investment would be essential components of such a strategy.

Obstacles

One of the difficulties in arriving at an economic policy consensus is that many of the over one hundred ministers are unaware of the gravity of the economic situation and of the critical problems facing the country. The need for changes in fiscal and monetary policy and the crucial importance of economic reforms are not understood. Instead, they support economic policies that pander to the popularity of the electorate that have aggravated rather than resolved the country’s economic problems. Their outmoded ideolo- gies and impractical ideas dominate policy making.

Policy inconsistency

Economic development in the long run is certainly in the balance without an agreement on a vigorous reform agenda. Vacillation in its economic program could drive the economy into a more serious and calamitous crisis. Policy inconsistency and uncertainty in the implementation of policies have eroded investor confidence. The last two years have seen vacillations in policies, withdrawal or non implementation of announced policies and weak execution of economic programs.

Foreign direct investment

It is widely recognised that foreign direct investment in export manufacturing industry is crucial for improving the trade balance. The uncertainty in policies had the effect of not attracting foreign direct investments that were vital for generating exports. In fact foreign investments have decreased in the period after the government took office in 2015.

Foremost among the prerequisites to attract FDI is a consensus on economic policies and certainty in their implementation to inspire confidence among foreign investors. In addition, the political environment that resulted in policy uncertainty was a significant factor for the lack of investor confidence. Pandering to political populism has made the government not pursue certain essential policies and changed announced policies or not implemented key economic reforms.

Consensus imperative

An agreed economic agenda for the next few years of the unity government is imperative. The government must take firm steps to agree to a common economic program and implement it effectively and expeditiously. Economic populism rather than economic rationality characterised its first two years.

Admittedly when two parties with different political ideologies and economic programs unite to form a government a consensus on policy is difficult to achieve. A pragmatic perspectives and a degree of compromise on both sides of the coalition are needed. Without such an agreed economic policy, the boast of the President and the Prime Minister that the two main parties in the country have got together is in vain.

Pragmatism

A consensus on economic policies must be based on pragmatism, recognition of the current economic impasse and economic imperatives rather than the dictates of political populism. A pragmatic approach with a view to resolving the crisis in the balance of payments and external reserves, reducing the trade deficit, containing the fiscal deficit, attracting foreign investments, and stimulating growth must guide the discussions.

Reform of state owned enterprises

One of the most difficult areas where a consensus needs to be arrived at, and is perhaps the most difficult, is the reform of state owned enterprises that is a heavy burden on the public purse and a drag on economic development. It is one of the most controversial and contentious issues as many in the government ignore the economic and financial realities as they are ideologically committed to not selling state enterprises. A compromise to selling some of the loss making state enterprises, reforming the management of others and agreeing to not privatise some key state owned enterprises has to be arrived at.

Fiscal consolidation

A strong commitment to ensure fiscal consolidation is crucial. One of the important achievements of the government in 2016 is the bringing down of the fiscal deficit to around 4 percent of GDP by a significant increase in government revenue. This is a noteworthy achievement. The government must be strongly committed to increasing revenue and containing government expenditure so that the target of achieving a fiscal deficit of 3.5 percent of GDP is achieved in 2020. The large fiscal deficits of the past have been at the root of many of the country’s economic woes.

Way forward

Most of the country’ post independent economic history has been dictated by pandering to populism rather than responding to economic imperatives. Departure from this approach is essential to resolve the current economic crisis and revive and reinvigorate the flagging economy. Arriving at a common pragmatic agenda is difficult as there is a lack of understanding of the economic plight of the country and the needed strategies to resolve them. Ideological biases and prejudices, commitment to populist policies and political popularity dominate the thinking of legislators. Nevertheless it is vital for the political leadership to explain the economic crisis and convince the coalition members to pursue pragmatic economic policies in the long run interests of the economy. The President must make a pronouncement on policy affirming their commitment to implement those policies within the next two years to inspire confidence in the government and enhance domestic and foreign investment.