Political stability urgently needed to address economic crisis

The resolution of the current severe economic crisis is in any case a herculean task. Without political stability, it is an impossible one. At the time of writing there was no word on who would be chosen the Prime Minister of a “national” interim government.

No Finance Minister

Without a Finance Minister and Cabinet, the current discussions with the International Monetary Fund (IMF), World Bank and other multilateral organisations will be inconclusive. Even humanitarian aid may be stalled.

CB Governor Weerasinghe

The gravity of this instability was underscored by Central Bank Governor, Dr. NandalalWeerasinghe. He told a media conference a few days ago that he had communicated to all political parties, including the President, that if no political stability was achieved in the next couple of weeks, he would resign from his post of Governor.

Extremely challenging

The Governor said it was extremely challenging to revive an economy in a country where law and order is not maintained. He emphasised that political stability is paramount and if the current situation continues in the next two to three days with no government in place, things could get worse with prolonged power cuts for about ten to twelve hours, massive shortages of fuel and other essential items.

No government

He emphasisedthat without a legitimate government with a Prime Minister, Cabinet and a Finance Minister, the country will not be able to proceed with debt restructuring and IMF negotiations.

No understanding

People do not understand this. They want immediate relief to the shortages of food, fuel, medicines, and essentials and a reduction of the soaring prices.

Foreign reserves

The foreign exchange scarcity has reached a nadir of US$ 20 million, adequate for only a week’s imports. How do we resolve this crisis without a government?

The turn of events since last Monday dashed any hopes of a political arrangement conducive to an economic recovery. There is no certainty as to how and where the current anarchic conditions would lead to an impact on the economy.

Hope

There was a glimmer of hope that the political impasse that has gripped the country for months would be resolved by the proposals of the Bar Association of Sri Lanka (BASL) to form an all-party national government. It was only a glimmer of expectation as several of the conditions in the Bar Association of Sri Lanka ( BASL) proposal had yet to be agreed on and an acceptable leader is chosen.

The only step forward was the resignation of Prime Minister Mahinda Rajapaksa. However, the consequent violence, breakdown of law and order and the chaotic state of the country is hardly conducive to tackling the grave economic problems facing the country. The country is heading to a state of anarchy where life is ‘nasty, brutish and short’.

Anarchy

Protests, demonstrations, strikes and long lines of people waiting for gas, petrol and kerosene have been the dominant feature of life in Sri Lanka for several weeks. Yet there are no signs of durable solutions to these scarcities in sight. Only occasional relief when there is foreign assistance.

The current chaos only aggravates the scarcities and makes the amelioration of the economic problems even more difficult. Even this humanitarian assistance and arrangements of international organisations to divert project assistance to relief measures and subsidies may not be forthcoming in the current chaos and anarchy and human rights violations.

Economy

The foreign reserves have dwindled to as low as US$ 20 million with little prospect of an improvement in the balance of payments. The country is entirely dependent on aid from international organisations, friendly countries and even NGOs and people overseas. Immediate relief would be from such humanitarian aid.

Aid

There is an expectation that friendly governments and international organisations would provide loans till the IMF programme is in place. Several governments and international organisations have promised humanitarian aid, but will these be forthcoming in this situation of there being no Prime Minister and cabinet. Will the bridging finance needed be forthcoming in this perilous state of political instability and no law and order?

MR out

IMF

Talks are taking place between the government and the IMF to obtain assistance. The expectation of obtaining the Rapid Financial Instrument (RFI), on which the government pinned its expectation, has been disappointing as debt sustainability is a condition of such assistance. The discussions to obtain an Extended Credit Facility (ECF) too are in the balance with the country sans a Finance Minister.

Other assistance

There is no option but come to an arrangement with the IMF for an Extended Credit Facility ( ECF) and a longer term Structural Credit Facility ( SCF). Both these programmes require an agreement to fulfill certain conditions of good economic management. These include bringing down the fiscal deficit or fiscal consolidation by pruning down expenditure and increasing government revenue, as discussed in last Sunday’s column. These would be politically unpopular and bring further hardships on people.

National government

A national government consisting of all political parties would be able to implement these policies. If however any party leaves the coalition to gain popularity its implementation will be difficult. If the required hard economic decisions are not taken and implemented, the country is likely to sink into a state of economic deprivation that is difficult to imagine.

Brighter prospect

If, on the other hand, the country adopts the reform measures to achieve fiscal consolidation and strengthens the public finances and the country’s exchange rate management that ensures a lower trade deficit, higher earnings from ICT services, conditions conducive to increased tourist earnings and inward remittances, we would be on the road to economic recovery and development.

Conclusion

The road to economic recovery is paved with many steps of difficult policies and economic reforms that are unpopular. Only an all- party competent government could implement these reforms and correct economic policies that are unpopular policies. The resolution of the current political crisis and social unrest are preconditions to the formation of such a government. Will it be achieved?