Economy facing turbulent political times and oil price hike
Can the Sri Lankan economy be resilient in a turbulent political environment? The events since the elections of April 2 make this the uppermost question in people's mind. Regrettably the unfolding events make people more and more sceptical of political events becoming any saner.

The President's statement on the eve of her departure abroad hardly did anything to bolster economic confidence. Her departure appeared a running away from the political crises at home. The future of the economy must rest on the shoulders of producers of goods and services, big and small, whose expectations of government pursuing proactive policies conducive to their activities, must be kept in cold storage.

One leading businessman was quoted in the Financial Times of June 10 as saying that between January and April we did not have a government owing to the impending elections and that the parliamentary fracas had demonstrated that we did not need one. However facetious this comment may have been, it has a kernel of truth.

There can be little expectation that the political problems of a minority government would be solved. While it finds its ways of limping and limping from one crisis to another, the people of the country must find their means of livelihood. And that is becoming more and more difficult owing to the escalating prices. It is no secret that vegetable prices have been skyrocketing from April onwards.

The rise in oil prices is still to have its impact owing to the government's pricing policies. The previous government adopted a policy of passing on higher import costs of petroleum products gradually by a price formula related to import prices, and some cross subsidisation. The present practice of retaining consumer prices of petroleum products at old prices will mean that sooner rather than later, prices will hit the consumer in shock waves.

This pricing policy has many disadvantages. Consumers would not be adjusting their demand to the changes in international prices. Their demand would be based on an unsustainable price level. This has implications for both government finances and the trade balance. Consumers not curtailing demand for petroleum products in response to higher prices would result in the continuation of high expenditure on imports. Already the trade deficit is threatening. Chances are that the trade deficit will zoom to an unprecedented amount by the end of the year.

The suppression of consumer prices would result in a subsidisation of prices that would be a cost to the government. This means that public expenditure would increase resulting in a higher budget deficit than predicted. The costs of the higher prices would have a very significant impact on electricity cost generation and this would mean higher government expenditure to subsidise electricity as well.

The political uncertainties, irresponsible political behaviour, inaction in economic policies, disputes in the administration and focus on petty issues like the purchase of land by foreigners, are all leading to an erosion of confidence in the government's economic policies. These together with the adverse trade balance and the unfavourable international price movements have placed a strain on foreign exchange. The depreciation of the rupee has been the consequence. For the first time the US Dollar is worth more than one hundred rupees. This depreciation of the rupee would in turn result in higher import prices and fuel a spiralling of prices. Higher inflation is on the cards with its debilitating impact on economic growth and the livelihoods of the poor.

The biggest danger at the moment is that a government faced with these difficulties, and having no majority in parliament, would pursue policies that are populist and dangerous to the economy in the long run. The "cure" may be worse than the problem. The pursuance of inward looking economic policies, government control of economic activities, restrictions on exchange transactions, limitations on foreign investment and a return to state controlled policies may result in a reversal of economic trends from which it may be difficult to recover.

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