A committed consistent and predictable economic programme imperative

Last Sunday’s column that discussed the economic consequences of the recent natural disasters underscored three crucial imperatives. These were: the need to prevent or mitigate these occurrences, developing a more robust economy that would be resilient to withstand such disasters and the adoption of a certain consistent and committed economic programme.

Agreement on economic policy

The lack of an agreed economic programme has been the foremost reason for the government’s inability to achieve rapid economic growth. The government’s preoccupation with the flood relief and reconstruction should not distract it from the urgent need to adopt and implement an agreed pragmatic economic programme. Such an announcement of the government’s policy commitment has been long delayed and cannot be postponed any further.

Robust economy

A robust economy is vital to withstand natural calamities in a more resilient manner. And to have a strong economy the government must pursue coherent, pragmatic and certain economic policies that address the much needed implementation of reforms. The preoccupation with floods should not divert the government’s attention from the urgent need to address the much needed implementation of reforms. However there are no signs so far of the government formulating and implementing an agreed economic programme for the next two years of its regime. In fact the natural disasters appear to be another reason for the government’s distraction from coming to a consensus on economic policies.

Reasons for inertia

What are the reasons for the government’s inability to develop an agreed economic programme? Is it that the government does not realise the need to announce a clear and certain economic program? Is it a sheer lack of understanding of the importance of such an agreement to spur economic growth? Is it the inability to arrive at a consensus among the constituent parties of the government? Perhaps it is all these factors and the political milieu of the country.

Political culture

The political milieu and culture, the composition of parliament, the constituent elements of the government and an electorate that is quite oblivious of economic realities and needed policies for economic development are fundamental reasons for the lack of political leadership in economic affairs. Political gain rather than economic development concerns guide priorities in policies. Economic statement In November 2015 the Prime Minister Ranil Wickremesinghe made a statement on economic policy in parliament. It was a clear concise statement of the government’s economic policy. Many expected a more detailed economic strategy to be unfolded soon after. However Budget 2016 a few days later did not follow the economic principles enunciated by the PM, even though the Finance Minister himself was from the Prime Minister’s party. The confusing budget proposals, withdrawal of several fiscal measures and ad hoc policies added uncertainty and confusion to economic policies.

Ever since then the policies pursued, changes in response to opposition and contradictory statements, have robbed the country of a clear economic policy. This lack of an agreed policy has resulted in an erosion of investor confidence that is clearly seen in the declining trend in foreign direct investment. Domestic investment too has been disincentivised by this uncertainty in government policy. Agreement on economic policy One of the key factors for this lack of commitment to an agreed economic policy is the government consisting of two parties that have divergent views on the economy. This makes it difficult to forge a common policy. Therefore the survival strategy of the unity government has been inaction in forging a common economic programme. This has perhaps been successful in the coalition not disintegrating into its parts, but it has been economically disastrous.

Many ministers and members of parliament do not have even an elementary understanding of economic affairs. Their interests are to enjoy perks, acquire wealth and gain political popularity. This is hardly a fertile ground in which to come to an agreed economic programme. They would oppose rather than support an economic reform agenda.

Furthermore, most parliamentarians are not aware of the seriousness of the country’s economic problems. They are even more ignorant of the needed policy directions to solve the economic crisis. The large majority of government members are not only ignorant of economic issues; they are possessed by way out, obsolete and impractical policies.

Obsolete policies

For instance they are of the view that the Sri Lankan economy could progress by banning imports, by import substitution policies and increasing tariffs. They believe that the government should expand into industrial and other business enterprises. The fact that state owned enterprises are making huge losses is of no concern. They do not understand the economy is weak owing to the financial burdens created by losses of state owned enterprises. They are therefore opposed to the sale of state owned enterprises. They do not recognise the need for fiscal discipline and think that governments have inexhaustible financial resources. This political milieu is hardly conducive for the adoption of pragmatic economic policies.

Pragmatic policies

Many legislators are still possessed by obsolete ideological positions that account for the country’s inability to pursue pragmatic policies. In contrast, former communist counties like China and Vietnam, and our neighbours, India and Bangladesh, are pursuing policies that are attracting foreign investment, expanding exports and are growing at some of the highest rates of economic growth. The fact that Sri Lankan investors and skilled personnel are moving to these countries is clear evidence that they have got it right and we have got it wrong.

Conclusion

In 2015 when the unity government was formed the big boast of the new government was that the two main parties have united for the first time to carry the country forward. Half way in its term of office this “unity” has proved to be a drag in adopting and implementing economic policies. The government has failed to make its economic policies clear and certain. It also lacks a capacity to undertake essential economic reforms.

The unity government has delayed far too long in developing an agreed economic policy and announcing it. Consequently the country’s economic performance has been far below expectations and potential. Foreign direct investments that were expected to flow with the change of regime did not materialise. In fact FDI has declined in the last two years. This has been an important constraint to higher growth.

An agreed economic agenda must be formulated, announced and effectively implemented. The recent natural disasters should not detract the government from this urgent imperative.