Economic development in a confused political environment

The President’s speech at the independence commemoration ceremony last Monday clearly demonstrated the divisive nature of our political leadership and the incapacity to forge a united effort to achieve economic stability and development.

Rajapaksa’s minister

Apart from the inappropriateness of such criticism in an Independence Day Speech to the nation, it is incongruous as Mr. Sirisena was in the cabinets of Mr. Rajapaksa and held several key cabinet positions in his government. It was also the same Mr. Rajapaksa that President Sirisena thought fit to appoint as the Prime Minister on October 26th.

President Sirisena’s criticism of his Prime Minister Ranil Wickremesinghe with whom he has to work till the Presidential election in November is equally shocking.

The President’s speech will not inspire the country to achieve economic and social development. This political bickering is a serious strain on the economic development of the country. It portends a bleak environment for this year’s economic policy implementation.

Economic impact

The economic implications of this confused political backdrop is that a consensus on economic policies and pursuance of consistent and certain economic policies would be difficult. The already slow moving economy is unlikely to have an impetus in this confused political environment. Investors would adopt a wait and see attitude till there is political stability.

Short term strategy

What then is the short term strategy that could be adopted till the elections? Ambitious long term programmes would have to be shelved. Instead, pragmatic and politically feasible policies based on the present local and global situation must be adopted.

What are needed now are pragmatic economic policies that are politically feasible. Political compulsions prevent the adoption of much needed economic and social reforms that are vital for rapid development. The huge losses of state enterprise remain a burden on the economy and public. Yet their reform is politically impossible. A reform agenda can only be pursued by a strong committed government at the beginning of its term of office, not in the run up to elections.

As it is often said good economics is bad politics in the short run, but good politics in the long run. The challenge facing the government now in this election year is to adopt economic policies that do not destabilise the economy while ensuring its popularity. Fiscal slippage would destabilise the economy and

economic growth difficult to achieve.

Effective implementation

The lack of implementation of economic programmes and policies have been a key weakness of the last four years. The government must redouble its efforts to produce economic gains. Effective implementation of policies is crucial to ensuring economic benefits that could boost the government’s popularity.

Budget

The key to ensuring economic stability is the outcome of the 2019 Budget that is expected to be presented next month. The fundamental issue is whether a populist budget in an election year could ensure fiscal consolidation that is vital for economic stability.

One of the significant economic achievements of the government has been the progressive reduction of the fiscal deficit. It has been achieved by increasing the low tax revenues. Tax revenues have been increased to about 14 percent of GDP and the fiscal deficit reduced to around 4.5 percent. It is important to ensure that this achievement is not frittered away owing to the political compulsions of the impending elections. The fiscal deficit is targeted to be reduced to 4 percent of GDP this year. Attaining this would be significant for economic stability and development. The paramount issue is whether government expenditure could be contained to reduce the fiscal deficit. Will government expenditure expand to widen the trade deficit and destabilize the economy?

Populist programmes

Several populist programmes that are expected in the Budget would increase government expenditure. Furthermore during the course of the year there could be pressures to increase salaries, provide government employment, increase subsidies and hand-outs. Consequently there is a strong possibility that there would be expenditure overruns that would increase the fiscal deficit.

Hope and expectation

Ensuring that the fiscal deficit is contained is vital for economic stability and growth. One can only hope that the government would be concerned about economic stabilisation and long run economic growth and not allow fiscal slippage. In the current political environment and in an election year this more of a hope than an expectation.

Conducive environment

One of the constraints to development has been the inability to develop an environment conducive to investment. Much was expected in this direction by the present government, but little accomplished. The rhetoric of encouraging private investment has not been backed up by policies that give confidence to investors.

The current political confusion has aggravated this inhospitable environment. Rapid economic development in a confused political environment is impossible.

Way forward

We must learn from the mistakes of the past, accept the realities of the present and pursue pragmatic policies for the country’s economic and social development. Admittedly there were many achievements in the 71 post independent years, as we pointed out in last Sunday’s column.

The improvement of health and education has been a foremost achievement. The country has achieved self-sufficiency in rice despite the population growing threefold from about 7 million at independence to 21 million in 2017. We have a diversified economy that is much less dependent on its agriculture alone. The country has achieved middle income status, reduced poverty and increased per capita incomes significantly. However, income distribution appears to have worsened.

Underperformance

The country could have done better and achieved higher levels of economic development. Countries in Asia that were at a lesser level of development at the time of our independence have gone far ahead. We have missed many opportunities to develop faster. The political culture has been a foremost reason for this underperformance.

Conclusion

The inhospitable political context as well as the remaining months of the year being the run up to elections is not conducive for economic stability and growth. In such a context the government must at least ensure that there is no fiscal slippage. The fiscal deficit target of 4 percent of GDP must be achieved in 2019. If there is no such fiscal consolidation, then economic conditions in 2020 are likely to be onerous.