The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Economy sacrificed on the political altar
The rest of this year would be an electioneering year. Irrespective of whether we have an election, or two, or no election at all, the preoccupation of the country would be the impending elections.

And electioneering years are bad news for the economy. Worse still elections have been so frequent that the economy has to perform during a quick succession of electioneering years. The run up to the elections, the election period itself and until the government is formed or a new President is installed is a long period of listlessness in the administration. What can be even worse is the bad decision making in the run up period to the elections. It is a time for truckling to the masses when the economic decisions taken could be harmful to the economy in the long run.

The elections and the uncertainties created by them dampen investment, both foreign and local. Much needed reform measures are shelved and public investment on infrastructure projects get postponed and implementation of public sector projects become tardy. All these imply that we will continue to remain a modest growth economy unable to make the needed spurt to rapid growth. The fear that Finance Minister Dr. Sarath Amunugama expressed not so long ago that Sri Lanka may be left lagging behind other Asian economies is unfortunately the unfolding scenario.

In spite of this, the first half of this year's economic performance has been reasonably good and the hope is that whatever happens during the next five months the economy would be able to continue its upward march. The country's agricultural and industrial performance is indeed encouraging. Both tea and paddy production are heading to a new record high.

In the first half of the year tea production increased by 7 percent to 165.8 million kilograms. It is likely that tea production this year would surpass the record harvest of 310 million kilograms in 2002.The Maha paddy production reached a new high and it is most likely that the Yala harvest too would be good. This year's paddy production should ensure that the total needs of rice are met by domestic production. Coconut and Rubber production has not fared as well, but their decline is of lesser consequence.

Industrial production and exports continue to increase by about 11 per cent. Our main export, garments has shown resilience in spite of the withdrawal of the multi fibre agreement. Although the growth rate of garments exports is more modest at 9 per cent, it is indicative of the industry's resilience in the face of severe global competition.

The exports of garments have continued to rise indicating an adaptation to the new global environment. There has also been good news that the country has been able to obtain favoured treatment from EU countries. Other industrial exports have also grown and the prospect of a wide variety of other industrial exports increasing is good for the diversification of the country's export structure. Rubber and leather goods exports have increased by around 25 per cent and earned US$ 204 million. This is nearly one half the value of all agricultural exports.

The buoyancy of the Colombo Stock Market is almost surprising in the political context outlined earlier. One is inclined to believe that the business community is ignoring the political developments and taking the view that whatever happens there would be possibilities for investment and economic growth. They may be even of the view that a change of government may usher in a better period for investment and economic growth. Whatever the basis of investor- attitude, this optimism is a saving grace for the economy, as many of the negative factors outlined earlier are somewhat mitigated.

Economic prospects in the long run are a different matter. The uncertainty could have serious consequences for economic policy. The government could once again compromise with other parties on economic policy measures, as well as other policies that would have an adverse impact on the economy. It is also likely that the government would give into trade union and other political pressure and take decisions that would have disadvantageous consequences on the economy.

Demands for higher wages, recruitment of unwanted employees into the government or public corporations, expenditure that are politically beneficial and economically detrimental, are very much on the cards in this electioneering context. Fiscal extravagance is most likely in the coming months. Increased welfare expenditure and salaries are likely to increase the budget deficit to an extent that destabilises the economy further. The consequent inflationary pressures would require the Central Bank to take counter measures to contain the adverse effects of the government's fiscal over-spending. Raising interest rates are a policy response to this. The rise in interest rates in turn could have adverse effects on investment and corporate performance.

It is inevitable that the political uncertainty generates adverse macro economic conditions that undermine economic fundamentals. These adverse economic fundamentals would affect economic growth in diverse ways: rising prices, depreciation of the currency and high taxation. The inflationary pressures would induce strikes and possibly increases in wages. The economic reforms that were on the cards would be deferred, while other changes that would affect the economy adversely in the long run may be implemented.

The political context in which the economy has to operate is undoubtedly the biggest constraint to economic growth. Higher economic growth and resolution of economic and social problems will continue to be a dream, until the political and constitutional state of affairs is changed. The economy can hardly be expected to perform at its full potential in this environment. Nevertheless in the intervening time the unstable and uncertain environment has to be accepted and the economy must perform to its best under such conditions. Long term economic growth and development continue to be sacrificed in this political environment.

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