Financial Times

Emerging economic challenges
Two new reports from the multilateral lending agencies, the IMF and World Bank, have highlighted the challenges facing the country on the economic front. Their findings, and prescriptions, are timely as these are the critical issues that whoever wins November’s presidential election would have to deal with.

Whatever government is in power would have to grapple with a set of common problems and the leeway it would have is necessarily limited by the fact that we are a poor country, with limited resources and, above all, wracked by a two-decade long war that is still not over. Since what we have is only a ceasefire, albeit one that has halted much of the bloodshed, economists have taken to calling it a ‘pause-in-conflict economy’.

Whoever becomes the next president would have a delicate balancing act to perform, trying to meet the aspirations of diverse sections of society often with conflicting interests, and all the while ensuring that our economic fundamentals do not deteriorate further.

The influx of foreign aid that came in the aftermath of the tsunami and promises of debt relief have certainly helpssssssed to ease our economic difficulties but these inflows and pledges could easily have the effect of hiding reality and giving the public a distorted impression of our economic health.

The present status of the economy is mixed, with agriculture doing well, buoyed by good rains, and industry and exports increasing. On the negative side, inflation remains stubbornly high with the government being forced to raise interest rates which eventually would mean higher borrowing costs for businesses. Nor has the government been successful in reducing the budget deficit as planned while the revenue shortfall remains a persistent problem despite some improvement in recent times.

Certain state enterprises have improved their performance and show the beginnings of a turnaround but others remain a growing problem with the IMF even warning that they could drag down the rest of the economy. The World Bank’s annual 2006 World Development Report describes how wide gulfs of inequality in wealth and opportunity, both within and among nations, contribute to the persistence of extreme deprivation, often for a large proportion of the population.

It has made some interesting suggestions – the bank has urged rich countries to allow greater migration for unskilled workers from developing countries, to press ahead with trade liberalization under the Doha Round at the WTO, and to allow poor countries to use generic drugs.

The IMF report points out that the effects of the end of textile quotas under the Multi Fibre Arrangement has not been as bad as feared, although they say it is still too early to assess the ultimate impact. It has warned that high prices have a serious negative impact on economic growth, inflation and balance of payments.

Both presidential candidates would have to show a sense of responsibility in their election pledges and avoid any reckless spending spree which this country can ill afford. Any such move could erode Sri Lanka’s credibility as a place for investors and put off foreign investors who would be aware of the damage they could cause in the months and years ahead.

The presidential candidates would also have to make a special effort to prevent violence as that too would create a bad impression. The poll is going to be held during a sensitive period – in the run-up to the main tourist season – during which tourism firms make most of their money. The industry is still struggling to recover from the tsunami and cannot afford to cope with another blow. Violence during the polls campaign could drive away visitors.

Back to Business