Columns - The Sunday Times Economic Analysis

Elections: A setback to economic resurgence

By the Economist

The elections next year are a setback to an economic resurgence. The future pace and momentum of economic development is now quite uncertain. Most of the uncertainty has been created by the impending presidential elections that are likely to be followed y a general election. The focus of the country being on elections, economic activities are likely to suffer. Investors are likely to wait and see what happens. The administration would be tardy in dealing with routine matters of importance to the public and economic enterprises.

Economic policy decisions would be of a very short-term perspective and many of the decisions would not be in the long term interests of the economy. In short, the economy would be put on the back-burner perhaps for as much as the next five to six months. This would be an economic sacrifice the country can ill-afford at the very time when there were hopes and expectations of reaping a handsome peace dividend.

Several favourable factors emerged after the war that could have spurred economic development in the years ahead. The economy shifted from a crisis situation to one with several features that could have assisted its growth. The much awaited peace enabled several sectors and regions in the country that performed at much less than their potential to revive and contribute to the country’s GDP, increase incomes and reduce poverty in some of the most seriously affected regions of the country... Agriculture and fisheries in the North and East are undoubtedly key areas to benefit from peace. Fortunately their performance is not likely to be affected too seriously by the elections. Yet the support of the government and government agencies would no doubt be tardy and less effective. Nevertheless there is no doubt of a revival in economic activities in these regions though somewhat less than expected.

It is different in the case of tourism that was showing signs of resurgence. No doubt there would be a revival of tourism from what it was in the Island during the period of the war and when there were serious security concerns throughout the country. However, if the elections display a high extent of violence, it is likely that countries would once again give travel advisories for their citizens to keep off visiting Sri Lanka. Consequently we may not witness as much of a tourist boom as was expected. Hopefully the conduct of political activists would not deter tourism that has a history of setbacks. Each time there seemed to be an opportunity to bounce back, there was one or other factor to discourage tourists.

Since June this year there has been an increase in tourist arrivals, although not adequate to offset the setback to tourism in the early part of the year. The number of tourists arriving in the country is comparatively lower than for other Asian countries and the growth in tourism in the country much less than the growth of global tourism. The target of one million tourists is a realistic figure to achieve and yet it continues to be illusive. A peaceful run up to the election, at election time and after would ensure a flow of tourists. Violence would surely set back the industry again.

The country has moved from a serious foreign exchange reserve position early this year to that of ample reserves. The main reason for this was the achievement of peace and the IMF stand-by arrangement of US$ 2.6 billion. The confidence generated by the IMF involvement enabled the country to borrow internationally. Consequently foreign reserves have risen to US$ 5.2 billion that the Central Bank estimates as sufficient to finance about 5 to 6 months of imports. This is indeed a very comfortable foreign exchange reserve position that provides a platform for investment and confidence to foreign investors. Yet once again investors are likely to wait and see and the much needed higher rate of investment, particularly foreign investment, may be postponed.

The steady inflow of private remittances has been a bonus to the external finances. When the global recession occurred there were concerns that remittance would fall due to the depressed incomes and employment abroad. In fact the slow growth of remittances early this year has been reversed. There has been an acceleration in remittances in recent months. The earlier trend of an increase in remittances by about 5 percent has galloped to 10 percent this year. This has been especially important as the country continues to have a trade deficit. Further, in the period of a slow down in economic activity due to the elections, the increase in remittances would be a welcome boost to the economy.

Once again the elections will result in the neglect of needed reforms in the economy. Reforms in education, health, administration and public enterprises and fiscal management, among others, are preconditions for achieving sustained higher economic growth. The need for fiscal discipline has been stressed over and over again, accepted and yet not implemented. There has been inadequate disciplined action on the management of public finances for quite some time. The current period of elections is hardly conducive to an improvement in the public finances. The possibility of keeping to a fiscal deficit of 7 percent of GDP is remote. It is however likely that some creative accounting, statistical innovations and escape clauses would enable the continuation of the IMF stand-by facility. In fact we earnestly hope this would be the outcome in the interests of the economy.

The country has once again lost the opportunity to capitalise on the peace that has been achieved at much cost. Peace was rightly considered the foundational precondition for economic development in the last few decades. Having attained that, the national efforts at reconstruction and development have been distracted by elections. We must live in the hope that the elections would not do too much harm to the economy and once the presidential and parliamentary polls are over and a new parliament is elected the country’s serious economic problems would be addressed. Till then we can only expect a deterioration in economic management that would have to be reversed in the fullness of time.

Top to the page  |  E-mail  |  views[1]
Other Columns
Political Column
Govt. declares war on Fonseka
5th Column
Elections! Oh, they enliven people’s dull lives
The Economic Analysis
Elections: A setback to economic resurgence
Not Issued with this week
Focus on Rights
Mega corruption and an election


Reproduction of articles permitted when used without any alterations to contents and a link to the source page.
© Copyright 2009 | Wijeya Newspapers Ltd.Colombo. Sri Lanka. All Rights Reserved.| Site best viewed in IE ver 6.0 @ 1024 x 768 resolution