Policy uncertainty puts economy on backburner
"Do you have a policy? What is your policy? When do you hope to start implementing it?" These are questions the recent IMF team was expected to ask the government. The public of this country would also like to know the answers to these questions.

Two months into the new government the country finds itself without a clear economic leadership. The preoccupations are political: bickering over the election of the Speaker and other officers; controversies within the ruling coalition; continuous appointments to the cabinet; forging new alliances and so many manipulative moves on the political chess board and counter moves that are the main preoccupations of the last two months.

The promise of a clear statement of economic policy that was expected is yet to materialise. Fortunately the Finance Minister is able to continue within the parameters of the last budget and there appears to be a continuity of the broad framework of policies that have been pursued.

Meanwhile there are the danger signs as well. Oil prices are sky rocketing and at the time of writing the terrorist attacks in Saudi Arabia appear to be fuelling the escalation in prices. The impact of this on costs of electricity generation and losses on account of suppressed petroleum prices would strain the fiscal situation.

A revision of prices to accommodate the international price increases would have an adverse impact on the costs of production and living standards. A rise in prices of domestically produced commodities is making the costs of living to rise to unbearable levels for the working classes. The prospect of rice imports in the light of a shortfall in paddy production may add further to the increased imports. The trade gap has widened to a huge US $ 465 million in the first quarter of this year and threatens to widen further.

In spite of a continuing growth in exports, import growth outpaces these to continue the trend of increasing trade deficits in recent years. These developments and the current economic environment require a pro-active role in the economy. The present pre-occupations of the government in remaining in power by balancing the various minority political parties have led to political uncertainty.

The instability of the government is hardly the backdrop for sturdy economic growth. The uncertainty regarding the peace talks adds to this climate of economic uncertainty. The postponement of aid flows for reconstruction is robbing the government of resources. These factors and their strain on public finances will stifle the government's role in infrastructure development and the implementation of development projects. Long term economic growth is certainly in the balance. The political stability-growth nexus is well established in economics.

The economic history of our post-independent years demonstrates it clearly. It is certainly a tragedy that the country is unable to reach a higher growth path owing to the political constraints that continuously hinder implementation of economic policies. It appears the new government will keep going through various means of political expediency that are not conducive to economic growth.

To the extent that the various sectors of the economy could manage within the framework of current policies, there may be some resilience. But such resilience can only tide over a short period of economic and political uncertainty. For adequate economic growth certainty in the continuity of economic policies and political stability are needed. A more proactive role of the state and a better economic environment is imperative.

We may achieve a 5 per cent growth this year owing to a continuation of the cease-fire, the increasing trend in our industrial exports and growth in services. But any higher achievement is unlikely without political stability, progress in the peace talks and a more dynamic and proactive role by the government.

All three of these pre-requisites appear unlikely to be realised this year. Apart from short-term economic growth, the foundations for future economic growth may be sacrificed on the political altar. The question remains, what are the economic policies of the government and when will it start implementing them?

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