Columns

The first half of the year has been one of political change, instability, uncertainty and confusion. This state of affairs is likely to prevail till after the parliamentary elections, when hopefully a stable government takes office under President Maithripala Sirisena. Meanwhile the wheels of the economy must be kept running as smoothly as possible.

The current political uncertainties are hardly conducive to investment and growth. Economic growth is therefore likely to dip below the expected 6.5 per cent this year. Any spurt in economic growth can be expected only after a stable government is set up and economic policies and reforms instituted to stimulate economic growth.

Comparable period of political uncertainty
There was a comparable period of such political uncertainty and confusion soon after the assassination of Prime Minister SWRD Bandaranaike on September 29, 1959. The caretaker Prime Minister W. Dahanayake’s inexplicable political actions caused confusion and led to the dissolution of parliament. Prime Minister Dudley Senanayake, who formed the government after the March 1960 elections was defeated in parliament. A fresh election in July 1960 enabled a coalition government to be formed under the leadership of Mrs. Srimavo Bandaranaike.

This ten month period from September 1959 to July 1960 was chaotic and not helpful for economic activity. Although there are qualitative differences in the two periods, the economy suffered in both periods owing to these political uncertainties. Since today’s economy and economic issues are more complex than in the early 1960s, the economic impact of the current political uncertainty is more severe.

Economic growth
The trajectory of growth is likely to be lower than recent growth trends owing to fundamental weaknesses in the economy. A stable government with a clear cut economic policy framework is a prerequisite to resolving these weaknesses that existed even before the current political uncertainly.

The fundamental weaknesses include reducing the fiscal deficit over the medium term, improving the policy framework to give greater confidence to the private sector, including foreign direct investment, and winding down the foreign debt accumulated over the last several years. Economic and administrative reforms have to go hand in hand to reinvigorate the economy. These tasks await stable political conditions.

Core economy
Notwithstanding political uncertainties, core economic activities need not be adversely affected by this political uncertainty and unstable political environment. Agriculture, manufacturing and most services could continue to function uninterrupted as their performance is determined more by immediate conditions surrounding their production and demand factors than the political environment.

Manufacturing
Much of manufacturing is for exports and the buoyancy of the international market is a significant determinant of its expansion. Political conditions need not be detrimental to manufacturing performance. The medium term challenge is however to improve incentives for exports and to create conditions for competitive import substitution activities.

Agriculture
Agricultural production is affected more by the vagrancies of the weather than political uncertainties. Tea production reached 111 million metric tons in the first four months and may exceed last year’s production. However the tea sector is currently affected adversely by falling international prices rather than the political situation. Consequently tea export earnings have fallen by 13 percent in the first three months and total agricultural export earnings have fallen 6 percent in the first three months compared to the same period last year.

Similarly paddy and food crops have fared well, owing to sufficient rainfall. Maha 2014/15 paddy production is estimated at 2,622,709 metric tons is 17 per cent higher than the production of previous Maha season though 1 per cent lower than the production average of last 3 Maha seasons. Paddy production of Maha season would be sufficient for local consumption up to mid September 2015. If the Yala 2015 production is average paddy production in 2015 would be adequate and imports, if at all would be marginal. Other food crop production too has been good.

Construction decline
Construction that has been a dynamic sector in recent years has had a significant setback owing to the cut back in foreign funded infrastructure projects. Some services related to construction activities and reduced demand for commodities and services owing to the layback of labour would affect the services sector growth.However, not all construction activities were favorable for sustainable growth as this column has pointed out on several occasions.

Services sector
The services sector is likely to achieve a lower growth. That is not likely to be much lower as tourism, communications and banking are likely to grow. Information and communication technology services that have grown recently are likely to expand substantially this year.

Economic performance
The economy’s performance this year is likely to decline, but not by much owing to the political uncertainty as there are several sectors that are unaffected by the political drawbacks. However, the present political uncertainty has postponed much investment decision making. Foreign investors who welcomed the political change and constitutional reform are awaiting stability after the elections to invest.

Concluding reflections
The economic performance this year would be a minimalist one where those sectors that are unaffected by political uncertainty could continue to grow. In as far as higher investments and particularly foreign direct investments are concerned, these would have to await more stable political conditions and investment friendly economic policies. This is unlikely to improve till after a parliamentary election and a new stable government is established.

There are serious concerns on the political situation and the economic policies of the next government. Most important is the election of a stable government with clear cut pragmatic policies that could embark on economic and other reforms to propel the economy. The rectification of the fundamental economic weaknesses of a large fiscal deficit and inadequate revenue, containment of the foreign debt, and improving the investment climate requires firm political decisions that are mostly unpopular politically. A coalition government with divergent ideologies and policies could be detrimental to the economy’s long term development.

The political outcome of the parliamentary election would be critical for the country’s economic development. A politically stable government with pragmatic policies is needed to attain the country’s economic potential.