Post-election expectations of economic recovery and growth: Immediate actions and long -term vision

On the eve of Sri Lanka’s 17th parliamentary elections, people’s expectations are for a stable Government that would navigate the economy from its current economic crisis to long term economic stability and growth. Immediate measures to avert a further worsening of the economic conditions and a vision and policies for long term economic growth and social development are needed.

However, the country’s weak macroeconomic conditions and the recessionary global economy make the economic recovery difficult and its time span of such recovery uncertain as the containment of the global pandemic is a precondition for the economic revival.

Immediate problems

There are several important immediate problems that the new Government has to resolve prior to embarking on an economic growth strategy. These include the need to address the country’s external financial vulnerability and enhance Government revenue to reduce the large fiscal deficit. The growing unemployment and poverty in the country too require immediate relief measures.

Twin problems

The dire state of external finances in the current inhospitable global conditions necessitates foreign assistance to stabilise the external finances. In the case of the public finances, a U- turn in fiscal policies is needed to enhance government revenue. At the same time prudent management of government expenditure too is needed to reduce the ballooning fiscal deficit.

External vulnerability

The external reserves of the country that were US$ 7.5 billion at the end of last year had fallen to US$ 6.5 billion at the end of June this year. With the likely continuing balance of payments deficit in the second half of the year and debt repayment obligations of a little over US$ 1 billion the foreign reserves will reach a critically low level at the end of the year.

This adverse balance of payments will exist despite the stringent import controls, due to the fall in exports, workers’ remittances and negligible earnings from tourism.

The danger in the low reserves will be realised in 2021 when debt service obligations of about US$ 4 billion have to be met. It is important that Sri Lanka obtains moratoria on debt repayments as proposed by the IMF. The Government must also aggressively seek other multilateral and bilateral international assistance to overcome the external financial vulnerability.

Fiscal imbalance

The other serious problem is the burgeoning fiscal deficit that is a root cause for economic instability. While public expenditure is increasing, revenue is falling. The fiscal deficit is likely to reach double digit proportions this year and needs to be halved in 2021. This is an immediate problem that the Government must resolve.

A two- pronged strategy is needed to reduce the deficit: an increase in Government revenue and a containment of expenditure. Revenue enhancement is the more important and pragmatic course of action.

The Government should reverse the tax exemptions and tax reductions it implemented and revive the tax reforms of the previous Government that attempted to achieve fiscal consolidation through a revenue enhancing strategy. In the long run further tax reforms and expenditure changes are needed to achieve fiscal consolidation.

Five preconditions

Five preconditions are needed for the country to achieve economic development. These are a stable government committed to long run development of the country, achievement of ethnic harmony, eradication of corruption, sound and pragmatic economic policies and a certainty in their continuity and their effective implementation.

Pitfalls

There are several pitfalls the Government must guard against.

First, they must avoid implementing election promises that aggravate the economic difficulties. People must be taken into confidence and the dire state of the economy should be explained.

The Government’s own actions of cutting wasteful and non- essential and unnecessary expenditure and being frugal in public expenditure are means of convincing people of the Government’s economic policies.

Limiting the cabinet to no more than 20 members is an initial first step in that direction. It must formulate pragmatic economic policies and not be guided by ideological policies. It must shun psychopaths as advisors who tell the powers that be "what they like to hear."

Conclusion

Admittedly, whoever forms the Government would find it difficult to implement these suggestions. The political culture and milieu and ambitions of most of the country’s political leadership would enable these political and economic reforms. That is why the country will remain underdeveloped and not achieve her economic potential.