The two year mixed economic performance of the Unity Government

The absence of any celebratory events last month to mark two years of the Unity Government was perhaps owing to the state of confusion of the coalition. On the other hand, civil society leaders, who had played an important role in electing the new regime, organised a public meeting to remind the government of the promises it had made two years ago and to urge the government to fulfil its promises of good governance.

Although there were serious lapses in governance, the regime change was a milestone politically. It restored democratic governance. The economic achievements were however modest and disappointing. It was yet another missed opportunity for economic development.

Overview

The political changes in January and August 2015 were momentous achievements for democracy, but the last two year’ economic performance was far below expectations. Much was expected but little achieved. The economy has certainly not taken off on a higher trajectory of growth. External finances have been in continuous crisis, export performance inadequate and foreign investment, so vital for development dwindling rather than growing.

Despite the government’s boast that the two main parties in the country had joined together for the first time to resolve the country’s problems, its economic policies displayed an absence of agreement on vital economic issues. In retrospect, the coalition that was a political necessity was not advantageous for economic development.

Achievements

Then again, the government was not without significant achievements. Foremost among its achievements was the establishment of law and order and the rule of law and the establishment of good relations with foreign countries, especially those that matter for the economy. These are preconditions for rapid economic growth. Yet these alone will not suffice as the experience of the last two years amply demonstrates.

These achievements resulted in the restoration of GSP plus by the European Union that has boosted exports this year and tourism boomed. However, the advantages of these favourable development have been dissipated owing to a lack of consensus on economic policy, not only between the two main constituent parties of the government, but within them too.

Several government decisions have been changed or not implemented owing to opposition within the coalition. The recent resignation of the UNP Minister of Justice, who opposed the government’s decision on the Hambantota Port Development Project, is a clear example.

Economic performance

There was a dip in economic growth during the current regime. Economic growth fell to 4.8 percent in 2015 and to 4.4 percent in 2016. This year’s economic growth is expected to be about 4.5 percent. Furthermore, growth was not achieved owing to higher production in agriculture and industry, but construction and services. This import biased growth led to escalating import expenditure and larger trade deficits.

The trade deficit grew from US$8.1 billion in 2014 to US$8.4 billion in 2015 and to US$9.1 billion in 2016. In the first half of this year the trade deficit expanded to as much as US$4.2 billion despite an improving export performance in the last three months as import expenditure increased by much more.

Most disappointing was the country’s inability to attract foreign direct investment (FDI) that was so vital for rapid economic development. FDI was less than 1 percent of GDP during the current regime. Uncertainty in the government’s economic policies is a root cause for this.

Fiscal consolidation

A significant economic achievement of the government is the recent reduction of the fiscal deficit. After an initial lapse in fiscal discipline as soon as the government was formed and in the November 2015 budget, there has been a significant improvement in the reduction of the fiscal deficit by increased revenue. Government revenue collection increased to a record 14.2 percent of GDP in 2016. There is every prospect that the overall fiscal deficit target of 3.5 percent of GDP would be achieved in 2020 with the implementation of the new Inland Revenue Act. This would stabilise the economy and be conducive to economic development. However, the government should be vigilant to ensure that the fiscal deficit would not rise owing to increased expenditure such as from supplementary estimates for flood and drought relief. These unforeseen expenditures should be met by cuts in other unessential expenditure.

Mitigating circumstances

Admittedly there were extenuating conditions that impacted adversely on the economy. Floods and drought affected agricultural production and decreased food production. Drought increased fuel imports owing to low hydro generation of electricity. Worker remittances that are an important source for offsetting the trade deficit and supporting the balance of dipped recently owing to political turmoil in the Middle East.

Political background

Political conditions have been an important reason for the less than potential economic performance. First there has been no consensus between the two parties that constitute the unity government on economic policies. Even when there has been an apparent agreement, it is changed subsequently. This policy uncertainty has been a disincentive for investment.

The most glaring instance was the agreement with a Chinese firm to develop the Hambantota harbour that was approved by the cabinet and signed. After the signing the President said he would amend it. This is a clear case of lack of consensus on economic policy that has eroded confidence in government policies.

The government has failed to announce an economic policy framework and adhere to it. In several instances the government has retracted from its policies owing to opposition from within and opposition parties.

The bond scam has been a serious distraction from the govern- ment’s focus on economic policies. The controversies surrounding key ministers, resignation of ministers, constant and continuous protests and the obstructionist actions of the Joint Opposition has been to the detriment of the economy.

Obstructionist strategy

The opposition has a strategy to obstruct the government’s policies. They have instigated trade union actions outside labour unions’ interests to cripple the government’s economic programme. Trade union actions have become an obstructionist force in the economy. Even veteran trade unionists have pointed out that these actions were not legitimate trade union activities.

The opposition has also succeeded in mobilising large numbers of people to demonstrate and object to government programs such as the investment zone in Hambantota that has made the government shelve a foreign investment that would have contributed much to the economy.

These obstructionist actions not only deter the particular project but foreign investment in general. While other countries are inviting foreign investors to set up industries in their countries, we are frightening them away. This inhospitable environment has retarded the country’s development irreparably. The enemy is within.

Future

Although there are doubts as to whether the two parties will continue to govern together, the constitutional position is that the President’s tenure is till 2020 and parliament cannot be dissolved for another two years. The UNP with its large number of MPs is likely to continue to govern with some changes in the composition owing to political expediency. What is imperative is for the government to pursue a consistent and certain economic programme for the remaining years of this parliament.