Economic prospects: Political instability threat to economic growth in 2018 and beyond

Global economic conditions, political stability and effective implementation of pragmatic economic policies would determine the country’s economic performance this year. Of these three, political conditions would be the foremost determinant of the country’s economic growth, not only for this year, but for several years ahead.

Economic outlook

Despite the unstable political environment being a serious drawback, the economy is likely to grow somewhat faster than in 2017 by around 5 percent owing to expectation of better weather conditions, increased agricultural production, export growth and likely resuscitation of tourism. Food imports would decrease and the trade deficit is likely to contract from about US$9 billion last year to about US$8 billion and thereby improve the current account of the balance of payments. Inflation is likely to abate.

If conditions in the Middle East improve, the economy could benefit by a further increase in tea exports and higher workers’ remittances. On the other hand, foreign investment is likely to be dissuaded, if there is political uncertainty. The prevailing political conditions are not conducive towards a spurt in economic growth as envisaged in Vision 2025.

Global conditions

Overall global economic conditions are likely to be favourable. The world economy is expected to grow at 4 percent that would be favourable for exports. The US economy is robust with an economic growth of 2.5 percent, full employment and low inflation. Most of the European Union countries will grow steadily. Britain’s economic outlook is not too bright owing to Brexit. This may reduce our exports to the UK. The Indian economy is projected to grow by nearly 7 percent. The Chinese economy is expected to grow by 6.5 percent—faster than in the last few years. Therefore global economic conditions are favourable for international trade and exports.

Specific concerns

Nevertheless, there are some specific concerns. The inward looking policies and protectionist policies of the US could hamper exports. The US withdrawal of GSP to all developing countries temporarily would have a minimal impact as our largest export garments that does not enjoy this facility expanded significantly last year. A few other exports may be affected adversely by raising import prices in the US that would in turn depress demand for them.

Oil prices

Although oil prices are expected to increase, they are not expected to rise above US$60 per barrel, as shale oil production is likely to increase when oil prices rise. An increase in oil price would affect fuel import costs. In the first ten months of last year fuel import costs increased by 39 percent and accounted for nearly a third of the country’s import expenditure. An increase in domestic fuel prices would be necessary to contain the 2018 oil bill. This would add to the recent inflationary pressures and also cost of production of many items, especially if electricity tariffs are also increased.

Middle East

The continuation of the political upheaval in the Middle East would affect our tea exports, as well as workers’ remittances. The oil price increase will increase incomes and increase the demand for tea and migrant workers. If the political violence and conflicts in the region cease it would have an important impact on the balance of payments by increasing workers’ remittances.

Political instability

The year begins, as it ended last year, with rumblings of divisiveness within the government. The political rhetoric of the last few weeks leading up to the February provincial councils and local government elections appears to threaten the continuation of the “unity government”. As last Sunday’s Times editorial pointed out, “2018 is going to be dominated by politics and ‘politricks’. That is almost a certainty.”

Although the breakup of the coalition is unlikely owing to the necessity for both party’s survival, the political configuration and constitutional constraints, the disunity and divisiveness of the two coalition partners is harmful to the economy. At the best of times, the Unity government did not have a consensus on economic policies. This lack of an economic consensus and uncertainty in economic policies vitiated the implementation of economic policies, especially the much needed reforms.

One hopes that soon after the February polls there would be greater solidarity in the unity government that would inspire a new wave of confidence. This would be a decisive factor in the country’s economic performance in 2018 to 2020.

Implementation

Inefficient administration is one of the most serious obstacles to economic development. Much of the success of the economy would depend on the effective implementation of policies. This is particularly so with respect to much needed reforms.

The political context in 2018 is hardly likely to be conducive to major reforms such as the restructuring of loss making enterprises. Besides this there is an urgent need to improve the efficiency of public institutions that have a bearing on investment. The factors that affect the slowness of permitting foreign investment that is captured in the Ease of Doing Business Index requires to be improved drastically. The government must adopt mechanisms to ensure effective and speedy implementation of its economic policies. However preoccupation with elections in the first two months of the year and the divisiveness of the government are not conducive to enhancing the efficiency of the administration.

Economic outcome

Given these conditions what are the specific likely economic outcomes? The economy is likely to grow at around 5 percent with a positive growth in agriculture and industrial and services sectors. Inflation is likely to abate helped by increased food production. While exports are expected to continue its recent growth momentum, the trade balance will be in deficit, as has been the case in most years. However the trade deficit is likely to be somewhat less than in 2017 at around US$8 billion.

It is still not clear whether workers’ remittances would continue to dip and whether tourism would regain its growth witnessed in recent years. What is clear is that the performances in these would determine the balance of payments outcome. It is vital that the country has a higher balance of payments surplus to strengthen the foreign exchange reserves to enable the impending large debt repayments in 2019. Concluding reflections All things considered, this year’s economic performance would depend heavily on political stability, solidarity of the government and its capacity to pursue economic policies without political opportunism. Lack of consensus on economic policies in the government, political considerations and unscientific decision making dominating policy formulation and constant opposition and obstruction to economic policy implementation could be formidable drawbacks to the economy’s progress in 2018. Economic outcomes in 2018 to 2020 would be heavily dependent on political stability and the pursuance of consistent and pragmatic economic policies. manipulation of media and reliance on covert channels of communication often reduces soft power. Democracies should avoid the temptation to imitate these authoritarian sharp-power tools.

Moreover, shutting down legitimate Chinese soft-power tools can be counter-productive. Soft power is often used for competitive, zero-sum purposes; but it can also have positive sum aspects.

For example, if both China and the US wish to avoid conflict, exchange programs that increase American attraction to China, and vice versa, would benefit both countries. And on transnational issues such as climate change, where both countries can benefit from cooperation, soft power can help build the trust and create the networks that make such cooperation possible.

While it would be a mistake to prohibit Chinese soft-power efforts just because they sometimes shade into sharp power, it is also important to monitor the dividing line carefully. For example, the Hanban, the government agency that manages the 500 Confucius Institutes and 1,000 Confucius classrooms that China supports in universities and schools around the world to teach Chinese language and culture, must resist the temptation to set restrictions that limit academic freedom. Crossing that line has led to the disbanding of some Confucius Institutes.

As such cases show, the best defence against China’s use of soft-power programs as sharp-power tools is open exposure of such efforts. And this is where democracies have an advantage.

(The writer is a professor at Harvard and author of The Future of Power. )

Copyright: Project Syndicate, 2018. www.project-syndicate.org