Three and a half years of democratic gains and disappointing economic performance

Today marks three and a half years of the coalition government. Although there have been significant gains in democratic governance and political freedom, it has been a period of economic disappointment of below 5 percent economic growth.

Since the present regime took office on January 8, 2015, economic growth has been declining. The economy grew by only 4.8 percent in 2015, 4.5 percent in 2016 and 3.1 percent in 2017. This year’s first quarter’s growth was only 3.2 percent. The IMF expects the economy to grow by 4 percent this year, whereas the Central Bank projects a higher growth of 5 percent. The annual average growth for the four year period is only around 4 percent.

Disappointment

This economic performance is certainly a disappointment for those who had expected the regime to be a turning point in the country’s political and economic history. In retrospect, it is clear that a coalition of parties with divergent policies and undercurrents of dissenting political affiliations could not have made the needed changes in economic policies to perform better.

The assertion that the two main political parties had come together for the first time to build the nation turned out to be hollow. Each coalition partner placed party above nation and strove to gain popularity for itself at the expense of the other. This was especially detrimental for economic development.

Flaws

One of the fundamental flaws of the coalition was a lack of an agreed programme even for the first two and a half years. The lack of a coalition agreement with a common economic programme and agreed economic policies was evident from the beginning of the regime. Worse still there was no consensus within the cabinet and even within the parties themselves.

The lack of an understanding within the UNP itself that appeared to steer the economy, was clearly evident when the Prime Minister’s Economic Policy Statement of November 5th 2015 was not followed two weeks later in the November 20th Budget for 2016.

Fiscal slippage

The government began on the wrong foot, as it were, when it gave numerous concessions and price reductions no sooner it assumed office to win the general elections a few months later. This political move increased the fiscal deficit and had adverse effects on the trade balance and balance of payments. It destabilised the economy and created economic difficulties.

Fiscal consolidation

It is, however, to the credit of the government that after its initial lapse, it worked towards fiscal consolidation and succeeded in reducing the fiscal deficit in 2017 by enhancing revenue. The current concern is that in the run- up to the elections the Government’s expenditure could increase owing to political expedience and not attain the fiscal deficit target of 3.5 percent in 2020 that is in the long-run interests of economic stability and growth.

Fundamental weaknesses

The divisiveness of the Government, the distraction of the Central Bank bond scam, the local government elections, the continuous stream of strikes and political protests and obstructionist campaigns impaired the Government’s capacity to pursue policies for economic stability and growth. impaired the Government’s capacity to pursue policies for economic stability and growth. Economic reforms, as well as implementation of economic policies, were severely hampered by the focus on the bond scam. It also accentuated the political differences within the coalition and brought out its disagreement on economic policies. The bond scam has been a serious distraction from the Government’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 have been to the detriment of the economy.

Opposition

The obstructionist activities of the opposition made the implementation of economic policies even more difficult. Protests, strikes and communal violence delayed and in some instances made the Government abandon implementation of development projects. Besides this direct impact, these disturbances and road blocks were a severe setback to foreign investment and tourism. As Speaker Karu Jayasuriya observed recently, who would want to invest in a country where strikes and protests are a daily occurrence? Foreign investment that is vital to raise the economy to a higher growth trajectory remained inadequate.

Political and economic gains

Nevertheless, there have been significant political and economic gains. They include the establishment of law and order and the restoration of the rule of law – which are preconditions for rapid economic growth. The Government also succeeded in restoring good relations with foreign countries, especially those that matter for the economy.

These achievements resulted in the restoration of GSP Plus by the European Union and have boosted exports since March last year. There has also been a growth in tourism. However, the advantages of these favourable developments 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.

Mitigating circumstances

Admittedly there were extenuating conditions that impacted adversely on the economy during the three and a half years. 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 payments dipped recently owing to political turmoil in the Middle East.

Summing up

The economy has certainly not taken off on a higher trajectory of growth. External finances have been in continuous crisis. Export performance, though impressive in recent months, has been inadequate to contain the trade deficit. Foreign investment, so vital for development, has not been growing adequately. The political conditions discussed earlier have been the main reasons for the less than potential economic performance. This policy uncertainty has been a disincentive for investment.

All things considered the political; change three and a half years ago was of political and economic benefit. However, the economic performance during these years has been disappointing mainly due to the lack of a consensus on economic policies, uncertainty and inconsistency in policies. Such a political environment was not hospitable for foreign investment that was crucial to achieve a higher trajectory of growth.