Columns

Political and economic uncertainties have characterised the first days of the new regime. There is confusion about the course of political developments, the period in office of the current coalition government, the composition of parties for the forthcoming election and when it would be held. These political uncertainties as well as economic policies that have not been well thought out have not been conducive to business confidence and economic performance.

There is uncertainty about future economic policies. The taxation measures of the interim budget and the bond issue fiasco have impaired confidence in good economic management and investor confidence. The downward trend in the share market and low volumes of share trading are clear evidence of this. There is an attitude of wait and see among investors.

Economic performance
This state of affairs is detrimental to the country’s economic performance and a disappointment to those who strongly supported the election of President Maithripala Sirisena and wanted a regime change. Good governance, the rule of law, better foreign relations with the country’s main export markets, more rational priorities in public spending and other policy changes of the new Government were expected to boost economic development. Although these changes have been implemented, there is a great deal of political and economic uncertainty.

The reason for the current state of affairs is that the overwhelming objective of the opposition at the last presidential election was to overthrow a corrupt and autocratic regime and usher in good governance. The paramount issues were those of corruption, abuse of power, law and order and good governance. The economy was a secondary issue to be tackled after forming a government.

In this political context, extravagant promises that strained the public finances were unavoidable. The massive debt inherited by the Government, that has not yet been completely accounted, has made the task of economic management extremely onerous. The only advantage the Government had was that it was able to cut down extravagant expenditure in the 2015 budget as it was the beginning of the year.

National Government
The formation of a national government and measures towards national integration and national harmony would be conducive to long-run economic development and political stability. Yet some immediate measures are needed to ensure political stability and boost investor confidence to fuel economic growth.

The interim budget proposals were not well thought out and the principal elements of a comprehensive strategy for long-term economic growth are not discernable. It perhaps also reflects a changing of the guard of professional and technical capacity in the Treasury and Finance Ministry. Taxation measures such as the tax on businesses making profits of over Rs. 200 million are detrimental to business confidence.

Although the justification for imposing this tax is the taxing of unethical and corrupt practices of companies, it is irrational as some of the best companies with high investments are being penalised and new investors would reconsider investing large amounts. It has also violated a basic principle of taxation that taxes should not be retrospective as this tax is for the past income tax year 2013/14, but to be paid from earnings in 2014/15. This tax is not justifiable merely because it is a one off tax. This tax is one of the main reasons for the dip in the share market and a loss in business confidence. Clearer signs in corporate taxation and investment policies are needed to regain investor confidence.

Bond fiasco
The Central Bank’s bond fiasco was another factor eroding business confidence. The extension of the 30-year Rs. 1 billion bond issue to Rs. 10 billion without providing information to all primary dealers was a serious lapse and a setback to the Government and the economy as it cast a long shadow on the management of an important economic institution in the country.

The economy is likely to grow at a slower pace this year. This is not altogether an unfavourable development. The cutting down of unproductive infrastructure development that will retard growth is a positive development as much of the originally intended unproductive public expenditure would have contributed to GDP growth in the short run, but would have been a strain on the economy and lead to lower GDP growth in the medium to the long term.

However, political uncertainty is perhaps the most debilitating factor for economic performance. The composition of the Government, the uncertain lifetime of this parliament, and the indecision of party positions for the next election and when it would be held are political uncertainties bearing on the economy. The lack of clarity on what economic policies would be pursued by a post-election government is not conducive to current investment and growth.

There are clear signs of deceleration in the economy. The halting of many projects undertaken by the previous government has laid off workers and downsized firms. The lower public expenditure on infrastructure projects, however justified, will have an immediate setback to investment and employment.

Summing up
Political issues have dominated to such an extent that a comprehensive economic programme has not been formulated. Political uncertainties have created confusion in the minds of the electorate and the investor community. Economic uncertainty and confusion were to some extent inevitable when the nation’s priority was a regime change rather than fundamental economic issues.

Most economic policies were part of the election strategy rather than well thought out body of economic policies of an economic strategy. While the granting of concessions was inevitable, taxation measures should have been better designed so as to not erode confidence in the economy. The bond fiasco has added to the confusion quite unnecessarily and weakened the coalition government.

The National Government that has been formed must devise a policy framework for a five-year period. However, a commonly agreed economic programme by a coalition with varied ideological commitments is likely to be second or third best policies rather than pragmatic and effective economic policies for the country.