Four years of a National Government: Political change and economic disappointment
The fourth anniversary of what was a defining moment in the country’s political history passed by without much notice or celebrations. It was like a wedding anniversary of a marriage on the rocks.
End of dictatorship
January 9, 2015, however, marked an end of a dictatorial autocratic family regime. The new government restored the rule of law and democratic institutions. The political change was also unique in the history of the country as the two main political parties united to rule the nation.
Much was made of this unique development then. With hindsight one wonders whether it was a good idea, except to overthrow the previous regime that required a broad coalition that included all parties.
In disarray
Four years later, the unity government is no more, with the elements of the coalition going their own way. The outcome of the current confusion is difficult to predict. It could take unexpected twists and turns and lead to further political instability in the future. While predictions are impossible, the assessment of the country’s four-year performance is possible.
An assessment
There were significant gains politically and some economic achievements, too. However, the economic performance of the unity government that was expected to usher in a period of rapid economic growth was inadequate and disappointing.
Political achievements
The unity government’s reestablishment of democratic governance was significant. The establishment of law and order and the rule of law that were flouted by the previous regime was a substantial gain. The restoration of the rule of law that was important for its own intrinsic value was also of benefit for economic development. In Amartya Sen’s words, “Development is Freedom”.
More specifically, the restoration of the independence of the judiciary, the appointment of the Constitutional Council, an independent Election Commission, Police Commission, freedom of the media and the Right to Information act are irrefutable forward steps towards good and democratic governance. They were in stark contrast to the arbitrary government of the Rajapaksa regime.
Economic performance
The assessment of the four-year economic performance is the main concern of this space. There have been significant gains and severe disappointments. In spite of the current uncertain conditions, the four-year period, which made significant gains politically, had some economic successes, too. A dispassionate view must recognise those achievements, as well as the overall disappointing performance of the economy.
Economic repercussions
The political gains had economic benefits of consequence. A clear proof was the restoration of the GSP Plus concession by the European Union (EU). Exports have been gaining ground with the restoration of the GSP Plus and are expected to reach about US$ 12 billion last year that would be the country’s highest export earnings.
The improvement in the law and order situation revived tourism and earned the country the rank of the World’s best tourist destination when the October political anarchy set back tourist arrivals. Last year’s tourist earnings are estimated at around US$ 3.5 billion.
Economic growth
The economy has been performing at much less than its potential. The single composite indicator of economic growth, GDP growth, has been disappointing. In the four years since 2015, the annual average growth was only around 4 percent.
In 2015, the new government inherited a debt- ridden economy in decline. Economic growth had declined to 5 percent by 2014. It remained at 5 percent in 2015, the first year of the unity government and dipped to 4.5 percent in 2016 and to 3.1 percent in 2017. It is expected to have gained slightly to 3.5 percent last year. Economic growth of this magnitude has been less than expected and quite inadequate.
South Asian growth
In the fastest growing region of the world, Sri Lanka’s economic growth is about one half that of the South Asian region. In 2019 the South Asian region is expected to grow at 7 percent. In contrast, Sri Lanka is expected to grow at about 4 percent.
While other South Asian countries are forging ahead, Sri Lanka’s preoccupation with politics, inability to achieve a consensus on economic policies, inability to carry out reforms, obstruction of economic development projects by the opposition and weak implementation have retarded economic development in the last four years.
Economic gains
Notwithstanding these deficiencies there were several economic gains. The restoration of the GSP Plus status by the EU was a significant gain. Consequently exports expanded from March 2017. Exports increased from US$ 10.5 billion in 2015 to US$ 11.4 billion in 2017 and are expected to have increased to about US$ 12 billion last year.
The gains in exports have however been frittered away by more than commensurate increase in imports. Consequently the trade deficit expanded to US$ 9.6 billion in 2017 and is estimated to increase to over US$ 10 billion in 2018. Increased imports of fuel, vehicles and gold are responsible for this deterioration.
The balance of payments that had an overall surplus of US$ 2 billion in 2017, is likely to have declined last year owing to higher imports and outflow of capital.
Tourism
The boom in tourism in the last four years is mainly due to the improvement in law and order under the unity government. Tourist earnings increased to US$ 2.5 billion in 2017 and US$ 3.5 billion in 2018.
Fiscal consolidation
The reduction of the fiscal deficit in the last two years is a significant achievement of the government. This is of fundamental economic importance as large fiscal deficits have been an underlying reason for destabilising the economy.
The new regime began its four years disastrously by expanding the deficit to over 5 percent of GDP in its first year owing to a spate of public spending motivated by that year’s parliamentary elections in August. The consequent crisis made the government take measures to adopt a revenue-enhancing fiscal deficit reduction programme.
The fiscal deficit is estimated to have been brought down to 3.9 percent of GDP in 2018 and is expected to be contained at 3.5 percent of GDP in 2019. This fiscal consolidation has been a revenue-enhanced one rather than an expenditure- curtailing one. However, there are possibilities of reducing unproductive expenditure that must be attempted.
Concluding reflection
The defeat of the Rajapaksa regime and the assumption of power of a government consisting of the two main parties heightened expectations of political reform and economic development. The four years achieved significant progress in establishing the rule of law and independent institutions but the overall economic performance was far below expectations.
The lack of certainty in economic policies, failure to reform laws and regulations to attract foreign investors, political instability and uncertainty resulted in very low foreign investments, other than in the hospitality trade. Large international manufacturing companies have not found Sri Lanka a propitious place to set up industries.
Not much can be expected this year when the focus would be on the upcoming elections, reform of the constitution, party politics and populist economic policies. The grand opportunity of 2015 has been frittered away. When would we have another?