Implementing an agreed agenda vital to face economic challenges

The May Day cabinet reshuffle was not a great leap forward or even a turning of a new leaf. The changes did not inspire much confidence. The expectation of a stronger cabinet has hardly been achieved by the reshuffling of cabinet portfolios. Hopefully, the revised allocation of functions that it is expected to be gazetted would be more rational and enable effective implementation.

Indecisiveness

The long period of indecision and the delay in the formation of a new cabinet and a declaration of policy of the “reunited” unity government have been detrimental to the economy. It is particularly so as a strong government is needed to face the emerging challenges and economic issues.

The earnest expectation is that there is agreement by the two coalition parties to pursue an agreed programme for the next eighteen months. Even if the President’s speech in Parliament on the 8th does not make a definite statement on economic policy, the Prime Minister must make a definitive statement on the agreed economic agenda of the two parties to inspire confidence in the economy. If the Government fails to announce and implement an agreed policy based on a consensus on economic policies, the economic prospects for the country are worrisome and the political future of the two parties forming the unity government is bleak. Without such a new resolve based on an economic consensus and implemented by an efficient cabinet the economy would face a crisis by the end of its term of office.

Consensus

An agreed economic agenda among the two coalition partners is imperative for economic stability and growth in the remaining tenure of the Government. The country is awaiting a policy agreement in the next few days that is based on a consensus on economic policies. A new resolve to implement an agreed economic agenda is imperative to stabilise the economy and to propel it to higher growth. A failure to achieve such a consensus would not only affect the economy adversely, it would surely be political suicide for the UNP and SLFP.

No easy task

An agreement and consensus among the two parties is no easy task. The conduct of the Government in the last three years amply demonstrated this. The unity proved to be a fiction and the Government’s policies were ineffectively implemented. It is left to be seen whether the Government has learnt the lessons of its failure both economically and politically to make a new beginning. The programme of the new unity alliance should not be over ambitious. It should be an agreement on a limited programme arrived at with compromise and realism. It is better to have a limited consensus on economic policy that is adhered to rather than a wide range of areas that will result in controversy and conflict within the government.

Divergent views

There must be recognition that the two parties have divergent views on economic policies. Therefore, it is better to forge an understanding on key economic policies. These should include a guarantee of private property rights and especially foreign investment. There should be a limited programme of reform of SOEs rather than controversial large range of reforms. The agreement could spell out the state enterprises that will not be privatised. These could be subject to internal reforms that would increase their efficiency and reduce losses.

Fiscal consolidation

A vital area of political commitment should be to ensure that there is no large fiscal slippage. This is probably the most difficult to achieve. As pointed out last week, increased employment in state enterprises and the public service is likely to be a means of increasing party support. Such increased expenditure should be offset by savings in other areas and progressive taxation and tariffs on nonessential imports. The Government should impose progressive property and income taxes and ensure higher compliance. There is an urgent need to boost revenues substantially to meet the expenditure increases.

A means of reducing expenditure would be a drastic reduction in the allowances and entitlements of Members of Parliament and the large number of ministers. Fuel allowances of the public sector should be reduced and import of luxury vehicles banned. Such measures are politically feasible and popular. Although these measures may be inadequate to strengthen public finances, they are policies in the right direction.

Advantages

While there are daunting economic challenges, there are several economic advantages that would make the task of the Government easier. The most significant advantage is that agricultural production is likely to rebound. This is a clear political advantage as about a third of the country’s population’s livelihoods are likely to be improved. For this to happen the government has a role to play in ensuring that the good harvests are marketed and farmers obtain commensurate prices. The marketing mechanisms are weak and dominated by vested interests with massive political clout.

Unless there are effective policies to ensure fair prices for producers and consumers, the benefits of the higher production would be limited and the political gain dissipated. Improved food production has already lowered the cost of living and this is a political gain. Inflation dipped to just 2.6 percent the lowest in the last three years. Rural incomes would have also increased and livelihoods would improve.

Export growth is another positive development that would help. Yet the growth in imports may offset this advantage. Containing imports through appropriate monetary and fiscal policies is imperative.

Challenges

On the other hand, there are serious challenges facing the economy. Foremost among these is the increasing international fuel prices. The economically rational policy would be to increase domestic prices to contain consumption and imports and to prevent a fiscal burden. As discussed in last Sunday’s column, this is not a realistic option in the current political context.

A rise in oil prices would feed inflation and cause hardships to people. It would also increase costs of production of exports. There is serious danger that this as well as politically motivated expenditure would cause a serious fiscal slippage that would erode macroeconomic stability that would in turn hamper economic growth. What this implies is that the Government has to pursue least damaging economic policies that are politically feasible.

Economic growth

The political disruption and uncertainty is likely to impact on the longer run economic development. The political disruption and uncertainty disables the Government from undertaking reforms that would strengthen the economy’s capacity to achieve a much higher growth trajectory. While the inherent capacity of the economy would ensure an autonomous growth of around 5 percent, the political convulsions would damage the economy’s capacity to grow at a much higher rate in the future.

Last word

In its Annual Report for 2017 released recently, the Central Bank of Sri Lanka underscored the danger of pursuing economic policies that are detrimental to macroeconomic stability and economic growth. It warned: “The country can progress further only if policymaking remains rational with a long term focus on greater public good, while minimising policy swings motivated by short term political gains,”.

The paramount question is whether the government would heed this advice in the next year and a half when political popularity is the uppermost consideration.