Guest Column

22nd July 2001

Devastating economic impact of political crisis

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The continuing political pre-occupations together with a lack of business confidence, unfavourable macro-economic factors and a global recession impacting on our exports, are likely to make this year's economic performance one of the worst
By Nimal Sanderatne
The current political and constitutional crisis will have a devastating impact on the economy. It could not have come at a worst time. A global economic recession coupled with a downturn in our own economy is threatening to create a parlous economic situation. The economic costs of disruption and additional expenditures are serious strains on an already weakened economy. 

The congruence of an already unfavourable economic situation, inhospitable international economic conditions, political instability and industrial disruptions, are leading the country to a national crisis of huge proportions. At a time when pro-active economic interventions are needed, the focus of our leaders is on political moves and countermoves to remain in or regain power. Long-term economic growth in particular would be sacrificed owing to the immediate political concerns and anxieties. 

The continuing political pre-occupations together with a lack of business confidence, unfavourable macro-economic factors, such as an increasing inflationary trend and a tight credit market, and a global recession impacting on our exports, are likely to make this year's economic performance one of the worst, comparable to that of the power-crisis-ridden 1996 or the JVP-inflicted crippled economic performance of 1987-89. 

In both these periods the economy recorded low growth rates. In 1996 the economy grew by only 3.8 per cent. During the three-year period of JVP insurgency the average annual growth was less than 2.2 per cent. 

This year's economic growth is likely to hover around 3 per cent, about one half of last year's 6 per cent growth. In the first quarter of this year the economy grew by only 1.3 per cent. A sad performance in comparison with a 5 per cent growth in the last quarter of 2000 and a 6.6 per cent growth in the comparable first quarter of 2000. The signs of a down-turn in the economy were clear when the political crisis struck us. The political and constitutional crisis will only compound the economic crisis that has been evident. 

The down-turn in the US economy, signs of a European recession, and the stagnation of the Japanese economy will have their impacts on the economy. Sri Lanka's trade dependency of over 70 per cent makes it particularly vulnerable to global market conditions. The signs are already clear. Sri Lanka's most important manufactured exports earnings have fallen by 1.4 per cent in the first four months of the year. This trend in garment exports is likely to continue as the global recession gains momentum. Other industrial exports, some of which have fared well so far, may also be adversely affected by the slack international demand. 

Tourism, which has shown an improvement this year, mainly perhaps due to the influx of British cricket enthusiasts at the beginning of the year, is likely to feel the pinch of the stagnant economic conditions in developed countries. Since tourist travel is one of the most responsive to economic fluctuations, particularly income employment downturns, this favourable trend is likely to reverse later this year. 

The political and constitutional crisis is costly. The disruptions to economic activity we have already witnessed may spread further and continue for sometime. Plantation output, manufacturing and trade are likely to be adversely affected. Business confidence already at low ebb may recede further. The low turnovers in the Colombo Stock Exchange and the decline in the Share price indices are clear indicators of this. 

The all Share Price Index fell to 421.8 points by last Wednesday, compared to 448 at the end of last year. The end year position in 2000 was in fact the lowest end year position since 1994, when it was 997 index points. Business confidence and foreign investor confidence is likely to be further eroded in the coming weeks and months. Much damage would be done by then, even if political stability returns thereafter. 

Political stability and strong government are vital for good economic performance of developing countries. Without governmental leadership, a clear macro-economic policy framework, a commitment to ensure that the macro-economic fundamentals are healthy and a government with an ability to implement its economic policies the economy will languish. 

The government pre-occupation with its political and constitutional manoeuvers has meant that it has been unable to play its role in stimulating the economy. The wasteful expenditure of perhaps a billion rupees in a constitutionally unnecessary referendum would only add to eroding the confidence in the government's interest in the economy. A stagnant economy will in turn fuel social and political tensions. A vicious cycle indeed. The writer is a prominent economist and one-time Chairman of the Bank of Ceylon and the National Development Bank. 

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