Political uncertainties, social unrest and global recession threaten economic growth in 2024

The New Year that dawned on Monday is fraught with political uncertainties, considerable political confusion, social unrest and downside economic risks. It’s an election year when the country’s economic future will be determined.

Economy

The current global recession is a severe setback to manufactured exports. Last year’s declining trend in exports is likely to continue.

The destruction of crops by floods is a serious setback to the economy. It has not only decreased the country’s food supply; it has also increased food prices, destroyed the livelihoods of a large number of people, and increased the already high levels of poverty and malnutrition in the country.

The continuation of the tourist boom and the increase in remittances are vital to ensure adequate foreign reserves to enable the repayment of the restructured foreign debt obligations of an estimated US$ 6 billion.

Achieving the projected economic growth of 3 percent in 2024 is, therefore, a challenging task. In fact, it is unlikely.

Political uncertainty and confusion

The presidential election scheduled for the latter part of this year and the parliamentary elections thereafter have resulted in a plethora of presidential hopefuls and new political alliances.

Although there have been assurances that these elections will be held, there is some scepticism that they may not be held. Speculation is that the constitution will be changed for Parliament to elect the President.

Nothing is certain in this first week of the year.

Party alliances

There is, of course, much confusion as to what alliances would be formed to face the hustings. Electoral polls have shown contrasting and contradicting outcomes.

Impact on economy

The political confusion, uncertainty, and social unrest could have adverse impacts on the economy, especially the implementation of the ongoing IMF programme, and once again destabilise the economy.

Warning

As the Central Bank's former Governor, Dr. Indrajit Coomarasway, has repeatedly pointed out, we cannot afford to abandon the IMF Extended Finance Facility, as we have done on 16 previous occasions, without facing dire economic consequences.

Governor

The incumbent Governor, Dr. Nandalal Weerasinghe, has said that there is no other way to ensure economic stability and revival than by following the IMF prescriptions.

Opposition parties

Even opposition parties appear to have realised this and accepted this position, though they have said that were they to come to power, they would renegotiate the conditions. Whether this is realistic remains to be seen.

Such changes would be acceptable if the overall objectives of fiscal consolidation are achieved. One possibility is to decrease government expenditure, as suggested in previous columns.

Derail IMF programme

Apart from the post-election out-turn, there are severe threats to the effective implementation of the reform agenda in the run-up to the elections. The SLPP which enabled the passage of the reform measures by a majority of its votes, is disclaiming its reform agenda and openly opposing the tax measures needed for fiscal consolidation and privatisation of stateowned enterprises. This queer paradox makes it difficult to implement reforms, such as the privatisation of state-owned enterprises and the new tax measures, especially the VAT.

Social unrest

The widespread social unrest and the likelihood of strikes this year will be severe setbacks to the economy striving to move into a growth trajectory. Even the government’s expectation of a modest 3 percent growth this year could also be hampered by the impact of the continuing global recession, higher import prices, the devastation of large extents of paddy and food crops, and the financial strain of repaying about US$ 6 billion of foreign debt obligations.

Tourism and remittances

In this political and economic context, last year’s tourist boom and increased inward remittances must continue. Any setbacks to these could cause unbearable strains on the external reserves.

Foreign assistance

Further relief to the external finances is expected from increased foreign aid, especially increased project loans from multilateral agencies like the World Bank, the Asian Development Bank (ADB), and some foreign governments such as Japan and India. These could boost reserves temporarily.

Foreign investment

The expectation of foreign investment of a significant amount is unrealistic given the current unsettled political conditions, the low rating on the Ease of Doing Business Index, and the country’s high level of corruption.

In conclusion

When all these political uncertainties and economic difficulties are considered, it is difficult to foresee anything but a turbulent year ahead. We can, however, wish and hope that these turbulences will pass away and that a stable government with a new vision, realistic and pragmatic economic policies, and one that would minimise, if not eradicate, corruption will emerge at the next elections.