A return to uncertainty and confusion
The Deputy Minister
of Finance, playing the role of John the Baptist, unaware of the
impending political storm, was heralding the good news that the
Finance Minister had bonanzas for everyone, particularly, a salary
increase for public servants. Now we don't even know when Budget
2004 would be presented. We can't be even sure as to who would present
of this week illustrate clearly the environment of political instability
within which the Sri Lankan economy functions. There could be no
better illustration of the unstable situation than to find parliament
prorogued on the threshold of the Budget for 2004.
have once again underscored the dominant influence of politics on
the economy. This column was to contain a discussion of some pertinent
issues on public finances and fiscal management. These are not likely
to interest readers now. They are more likely to be concerned about
the broader issues of what is likely to happen to the economy in
this climate of uncertainty.
impact of the political developments would in fact depend on the
course of the political events themselves. These are not at all
clear for the time being. Three critical developments would have
a bearing on the economy. First, how would this constitutional and
political crisis be resolved? Second, how long will it take to return
to normalcy and greater degree of certainty of the future?
Third and most
important will be whether the cessation of war continues or will
there be a resumption of terrorism and war. Indications are that
there would be dissolution of parliament and fresh elections. There
are several possibilities. The most optimistic scenario is that
one party obtains a clear parliamentary majority and that the conflict
between the executive and the legislature would be resolved, in
one way or another, and that the peace process continues.
The worst scenario
is a continuous political stalemate and the resumption of hostilities.
There are several other in between combinations as well. Immediately
the unstable political conditions are likely to erode business confidence
and foreign investments.
It is clear
that the process of economic recovery that we have witnessed recently
has had a setback. The expected economic growth of 5.5 percent for
the year, which had been upped to a likely 6 per cent, may be depressed
somewhat, but not much, as eleven months had lapsed before the crisis.
The main production sectors' performance is also not likely to be
economic performance is more likely to be affected adversely. The
economic programme of the UNF government envisaged an acceleration
of economic growth to 6.5 per cent next year and an 8 to 10 per
cent growth in the medium term. An acceleration of this magnitude
will require more than the continuation of cessation of hostilities.
A durable and permanent settlement and political stability are essential
to ensure higher levels of investment for creating new production
capacity and substantial improvements in productivity.
doubts that such conditions would be met even before the crisis.
Now it is even less likely. Even a modest growth of 5 per cent next
year would require peace. For instance the 1.3 million metric tons
of paddy expected next year is only possible if the areas in the
East could cultivate without hindrance and the North and East adds
to the national output and the entire economy functions as an integrated
one. Growth in construction, tourism, financial services and trading
are likely to be adversely affected by the uncertain conditions.
Aid flows as well as foreign direct investment will be drastically
the required increment of investment to push the country to a higher
growth trajectory would have to await a return to more stable conditions.
Once again the prospect of rapid economic growth has been dashed
to the ground by a political shock. Have the political developments
once again resulted in a missed opportunity?