Upcoming elections may undermine economic reform, stability and growth

The country is on the eve of yet another phase of economic uncertainty, as elections next year are likely to arouse opposition to the ongoing economic reforms and policies. Consequently, the stability and growth of the economy are at risk.

Elections

A presidential election by the end of 2024 is constitutionally mandatory. It cannot be held before or after. However, there is some scepticism that it would be held. How the mandatory constitutional requirement could be postponed is difficult to foresee.

Political opinion

Indications are that a majority of voters have not made up their minds and that no recognised political party has substantial support. The highest proportion of voters appear undecided or support an undefined “others”. This leaves room for conjecture as to whether a new party or group would be a force in the elections.

Economic impact

This column makes no pretence to understand the current party prospects. What is relevant to this discussion is the economic impact of the impending elections.

Presidential election

In the current situation, one has to presume that there will be a presidential election in 2024 and a parliamentary election thereafter. The runup to the elections would be a period of economic uncertainty.

IMF programme

The presidential and parliamentary elections could derail the ongoing economic stabilisation and reform programme, as most political parties are likely to whip up popular sentiment against the reforms and promise that they would abandon the reform measures.

Oppose

They would oppose, especially, the higher taxation and privatisation of state-owned enterprises. On the other hand, they would promise to reduce taxes and not divest state enterprises.

Opportunism

Opposition political parties, as well as leading members of the governing coalition, are likely to oppose the ongoing IMF programme to gain popular support. In such a political environment, the government may respond by slowing down, modifying, or abandoning reforms.

Political uncertainty

The uncertainty in the country’s political developments in the next fifteen months is a serious concern for the continuity of economic reforms and fiscal and monetary stability.

Imperative

The effective implementation of the reform agenda is imperative for the country’s economic stability and growth. The forthcoming elections are a serious threat to their implementation.

Risks

There are several risks that are likely to gather momentum as the elections draw closer. Political parties pandering to popular prejudices, promising the abandonment of the IMF programme, and promising unaffordable benefits could result in the termination of the IMF facility, as has happened on 16 previous occasions. This is a severe threat to the country’s economy.

Economic implication

The economic implications of the run-up to the elections would be of utmost relevance for the economy. Among the risks and uncertainties is the prospect of a discontinuance of the IMF reforms. This would derail the reform agenda and destabilise the ongoing economic recovery.

The slowing down of the implementation and not achieving the targets is most likely.

Economic illiteracy

In a society with low economic literacy and expectations of handouts and immediate benefits, political parties are likely to pander to the unpopularity of the IMF reform agenda. This, as we pointed out earlier, is particularly so in respect of fiscal consolidation measures and the privatisation of state enterprises.

Promises

No doubt most political parties would oppose the IMF reforms and make extravagant promises that would reverse the reforms. Specifically, there would be election promises to not implement the higher taxation measures and reduce taxes. These would result in not achieving fiscal consolidation, abandoning the privatisation of state-owned enterprises, and even anti-corruption measures. These promises, if implemented, are likely to derail the reforms.

These unpopular policies are likely to be prominent election pledges. Several parties that are committed to impractical ideologies see an opportunity to gain popularity by opposing key aspects of the IMF reform agenda or the entire programme.

IMF

The IMF is portrayed as an imperialist agency that brings enormous hardships to people. They themselves do not have a pragmatic economic programme.

Government response

Even the government may defer the implementation of these reforms in response to political pressures. It may respond to these promises by increasing government expenditure or by delaying the reforms. Consequently, fiscal slippage and non-implementation of reforms are most likely. This could derail the much-needed reforms for economic stabilisation and growth.

Violations

If these are significant violations of the IMF agreement, it could lead to the discontinuation of the agreement with the IMF. Hopefully, the slippages are within the IMF's tolerance levels.

Hope

We believe that the good sense and understanding of the IMF will prevail to avert the abandonment of the IMF programme.

Argentina

The recent understanding that the IMF has shown to Argentina in extending its Extended Fund Facility (EFF) in spite of fiscal slippages makes us expect that the IMF will show an empathetic understanding of the island’s political economy and continue the programme in spite of some slippages. However, these would have to be within reasonable limits.

Political realities

The IMF is fully aware of the political realities of the country and is likely to make concessions. Argentina's recent political conditions were similar to ours. The IMF Mission to Argentina last month continued the Extended Finance Facility of US$ 7.5 billion, despite the fiscal slippage that occurred.

Comparison

While the largeness of the Argentinian economy and its significance are likely to have influenced the IMF decision, the geopolitical importance of Sri Lanka may be a factor in its decision.

Sri Lanka

This may happen when an IMF review mission visits the country in December. The current mission is likely to be satisfied with the implementation of the programme so far to approve the second tranche of US$ 299 million.

Summing up

There is a high probability of derailment of the reforms and even abandonment of them, as has happened on 16 previous occasions, if the coming elections turn out to be one for and against the IMF reforms. This must be averted by the people being made aware that the country would face a serious crisis if the IMF programme is discontinued. They should be made to understand that the country could face a severe economic crisis if we abandon the IMF.

Finally

We are entering a period of risks and uncertainties for the economy. The continuity of the current IMF programme is critically important for the country’s future. One can only hope that electoral politics will not derail the economic stabilisation and reform programme.