Political impasse an economic bottleneck
The country appears to be heading towards a political confrontation based on a constitutional question. Sri Lanka may be unique in finding a controversy on when an election should be held. The misfortune is that the controversy is heading for a settlement on the roads rather than in the courts.

The government not having a majority in parliament compounds the problem and yet with the motley composition of the majority opposition the government can hang around with clipped wings and an uncertain future. Meanwhile the economy must perform whatever the disruptions and uncertainties be. The only silver lining is that the broad framework of economic policies is also unalterable.

The problem for the government lies in the difficulty of passing any supplementary estimates. The freeze in military expenditure is a consequence of this difficulty. The economic problem for the country lies in the possibility of disruption in activities that may be caused by a major political confrontation.

This may be far more damaging to the economy than the usual dislocation of economic activities and the slow down in government administration that occurs for a period before an election. Political upheavals that lead to disruptions in economic activities and services could make a serious dent in economic performance. Worst of all the government would be uninterested in the economic fundamentals except in as far as its political chances are at risk. In fact this concern is more likely to erode the macroeconomic situation rather than improve it.

In the first quarter of this year there was a slow down in the economy owing to the impact of the tsunami, principally on the fishing and tourist sectors, and also possibly from the shock effects of it on other sectors. These sectors could be expected to be revived in due course and if the reconstruction and restoration of the fisheries sector goes apace then the economic growth in the second half could catch up.

This however is quite unlikely with the unfolding political plots and counter plots, the new political uncertainty and fears of confrontation. All these could be a bigger set back to the progress of the economy than the Tsunami effects.

Foreign investor confidence cannot be gauged by the good response to the Dialog IPO. The emerging political confrontation may erode foreign investor confidence. What is at stake is a capital outflow if the political situation gets heated and disruptive.

This would be a blow to the balance of payments that has to cope with nearly a quarter of export incomes being spent on oil imports. Apart from portfolio investment, foreign direct investment-- the more important component of foreign investment in the long run interests of the country-- could remain in limbo. The other important aspect of this political cum economic state of affairs is that some of the country's large and vital infrastructure projects may be difficult to implement. This would retard long-term economic prospects. The government has however reiterated that the energy projects and road construction would continue. Whether these intentions are realistic expectations in this political situation remains to be seen.

Meanwhile a serious threat to the economy arises out of the increasing prices of several inputs into agriculture and industry. The fuel and transport costs are eating into profit margins and are a severe disincentive for increased production. Increased costs of production and consequent high prices could affect the country's competitiveness in international markets. The immediate solution to the problem is the depreciation of the currency. This would however add further burdens on the people and rekindle inflation and further destabilise the economy and polity.

The positive factors are the gains in market access of governments to the European Union countries, increased production of tea in the first half of the year, the good Maha paddy harvest, the declining prices of rice and the resilience of the private sector in the face of a depressing political scenario. It appears that the economy has to poise itself to performing in the face of unstable governments and political uncertainties. The future of the Sri Lankan economy may be better secured by the emergence of a situation when the country's politics is rendered rather irrelevant for the economy.

The lesser state command of the economy since 1978 has been an important factor in the economy's resilience in the face of all the turmoil it has faced in recent years. No economy could be completely independent of political developments, but the lesser their influence on the economy, the greater the chance of steadier economic progress. This appears to be the realistic option in the messy constitutional and political state we are plagued with.

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