The unanimous verdict from a group of Sri Lankan experts was that the economic outlook for 2017 was positive but it came with a caveat – the government should resist the lure of playing populist politics and wooing the public with the local government elections around the corner. “There are many reasons to be positive [...]

The Sunday Times Sri Lanka

Thumbs up for economic outlook amidst fears populist politics might derail fiscal gains

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The unanimous verdict from a group of Sri Lankan experts was that the economic outlook for 2017 was positive but it came with a caveat – the government should resist the lure of playing populist politics and wooing the public with the local government elections around the corner.

“There are many reasons to be positive but if the economic situation continues to face a downturn in terms of people’s income and higher prices due to drought, these factors will have a significant role in the political outcome and my concern is that there might be a temptation by the government to roll back on the gains made on the fiscal front,” noted Deshal de Mel at the third edition of the Economic Insights seminar series on Thursday.

Mr. De Mel, head of Business Development at Hayleys Global Beverages, strongly counselled against ‘playing to the gallery’ at the well-attended event organised by the Ceylon Chamber of Commerce’s Economic Intelligence Unit.

“Given the kind of political needs there might be a need to boost government expenditure, roll back some of the taxation and these could have a negative impact in terms of perception in global markets,” he outlined.

Fellow-panellists Dr. Dushni Weerakoon and Shiran Fernando, as well as moderator Anushka Wijesinha were also united in giving the thumbs up for the economy and crediting the government with being on the right fiscal track with growth estimated at 5.6 per cent of GDP and a much lower deficit.

“I expect the macro-economic conditions to improve in 2017. If you look at the numbers on the fiscal front we are seeing a better than expected recovery in revenues,” Dr. Weerakoon, deputy-director, Institute of Policy Studies, pointed out.

She outlined the plus factors in the economy – the improvement on the fiscal front resulting in the Central Bank having more room to set monetary policy; the borrowing requirements of the government coming down; inflation diminishing and at a manageable level although overall money supply was a little on the high side; and the Central Bank moving in the right direction in allowing the rupee to adjust to underlying fundamentals.

“The Central Bank is doing its best under political/economy constraints to moderate any sharp fluctuations and allow the rate to depreciate gradually. If the policy directions and fiscal monetary exchange rate are not reversed then I think we can be more assured of a more stable environment in the coming months,” Dr Weerakoon added.

The independence of the Central Bank will be crucial in maintaining a positive economic outlook according to Mr. De Mel who also said the IMF programme helped the country bring back foreign investment as well as stabilise the currrency.

“If there is a slight increase in pressure from the government on the Central Bank to ease up in allowing the rupee to depreciate and if they interfere with this independence we are going to see slippage on the interest rate discipline on the rupee which will affect our external balance,” cautioned Mr. De Mel.

Shiran Fernando, lead economist and senior product head at Frontier Research, said there were many reasons to be positive, among them being the appointment of Dr. Indrajit Coomaraswamy as the Central Bank Governor whose understanding that there were no quick fixes was pragmatic.

“He has changed the landscape of the Central Bank and monetary policy as a whole,” said Mr. Fernando who also credited the government with bringing out a better budget.

“Many tax and revenue proposals are more credible and the fiscal numbers the government wants to achieve are more credible. We think that it will go a long way in reducing the borrowing pressure the government has been having in the last two years.”

Another plus for Mr. Fernando was the International Monetary Fund. “The IMF is like a gym trainer for the Sri Lankan economy. It makes sure that policy-makers and the government do not slack off or get too lethargic. All these factors in 2017 should keep things relatively smooth for reforms to takes place.”

While agreeing that the IMF had helped the country sort out its fiscal problems Dr. Weerakoon said “they have not been so successful in getting us to a more stable position on the external fronts. The objective of the IMF programme is to build up our non-borrowed reserves but unfortunately we have not done that.”

“We are not in a position to absorb any external shocks with four months of reserves and so we need an urgent injection of foreign capital either by way of government selling stakes in state owned enterprise or going to international capital markets,” she said.

Dr. Weerakoon added that a low growth/low inflation environment was a result of a lack of reforms and called for the need to revive private investment so as to attract FDIs.

“We need a strong signal from the government that there is a consistent reform effort that is being brought through and being implemented. The government must be able to deliver on those reforms. But with electoral cycles the possibility of such a structural reform programme being implemented fades with each month.”

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