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Economic Performance

The economic performance in the last two years has been disappointing. Compared with an annual average economic growth of 6.4 percent in 2010-15, the last two years annual average economic growth is likely to be about 4.5 percent. Economic growth slipped to 4.7 percent in 2015 and is expected to be around 4.5 percent in 2016. The economy grew by only 4 percent in the first nine months of last year.

Slow growth

This slower growth is not in itself the problem as the earlier higher growth was achieved largely through foreign funded large infrastructure development that created a huge foreign debt problem. The fall in growth in the last two years is partly the repercussions of the bad economic management of the previous regime, especially its amassing of a large public and foreign debt and high foreign debt servicing costs.

Failure

What is disappointing however is that the unity government aggravated the economic difficulties and brought the economy to the brink of a foreign exchange crisis by early 2016. The fiscal policies in 2015 and inappropriate monetary and tariff policies resulted in a sharp increase in imports and a massive trade deficit that contributed to a serious balance of payments problem.

The reckless budgets of 2015 and 2016 increased aggregate demand through its fiscal imprudence and inappropriate monetary policies and brought the country’s external finances to a critical position. Policy corrections in early 2016 have corrected this situation to ensure more macroeconomic stability.

Economic policy

Political motivations rather than economic imperatives have guided most of the unity government’s economic policies. It was only after facing a serious balance of payments problem that policies were put in place to stabilise the economy. The pains of such adjustment are serious economic challenges to the government this year.

Policy uncertainty

There is considerable uncertainty in economic policies of the government. Retraction of announced economic policies, withdrawal of several announced policies and contradictory stances on such issues as privatisation of state enterprises has eroded confidence in the government’s economic policies.

Investor confidence

Inability to implement announced policies has contributed towards a lack of confidence in the government’s capacity to implement economic policies. Statements on policies such as imposing a capital gains tax on share transactions that was ultimately not implemented and government intervention to reverse share transactions in the share market have eroded foreign investor confidence.

Owing to these reasons private investment is low and foreign direct investment that was expected to flow has not materialised. In fact foreign direct investments that are crucial for economic growth and export expansion have declined in the last two years.

Political confusion

Political factors account for much of the inappropriate economic policies. The prevailing political controversy within the coalition has resulted in a lack of policy cohesion that is one of the biggest obstacles to the pursuance of pragmatic economic policies.

Confused economic policies have lead to economic instability and low growth. What one section of the government proposes the other opposes and consequently there is much confusion and policy uncertainty and instability.

Economic consensus

There has not been a consensus on economic policy in the two years of the unity government’s regime. If the economy is to progress in 2017 and beyond, it is vital that the two main parties reach a consensus on economic policy and implement it together. However achieving such a consensus is getting more difficult.

No policy coherence

The cost of the lack of policy coherence is very significant. It gives adverse signals to all potential investors, both domestic and foreign. Without an agreed policy framework that is conducive for investment the economic weaknesses would continue. The political costs of not reaching a consensus would also be substantial. The continuation of the government with discontent from within would result in political, economic and administrative dysfunction.

Fiscal consolidation

One of the few right steps the government has taken is the commitment to bring down the fiscal deficit. Fiscal consolidation must be achieved this year and continued in the next few years to achieve economic stability.

Political gains

Undoubtedly the regime change two years ago brought about important beneficial changes. The “democratic revolution” conferred a number of significant benefits that restored the democratic character of the polity. The rule of law, independence of the judiciary and law and order freedom of expression and press freedom were restored. These are substantial political gains that could contribute much to the development of the country in many different ways.

Communal violence

However, there has been a resurgence of communal tensions and ethnic violence in several parts of the country, particularly in the North and East. These are not in the interest of national reconciliation and ethnic harmony that are vital for economic development. Strong measures to curb ethnic disturbances have been lacking. Unless the government takes firm measures to arrest communal violence, the economy will face irrecoverable setbacks.

New resolve needed

Time is running out. Unless the government is able to achieve a political and economic consensus and work together as a united front, as they did to win the elections, the country’s economic future is bleak. It is better to have a consensus on some of the key economic policy issues and be resolved to implement them, than have a vast canvas of economic policies that are not agreed on by the two main parties.

Policies for investment

The government must adopt economic policies that stabilises the economy and provides incentives for investment and growth. The government must arrive at an economic consensus based on clear, well thought out economic policies rather than adopt policies for immediate and short run political gains.

A new cohesion

It may be in the national interest for those who are not in agreement with the core policies to leave the coalition instead of being in it and opposing it from within and being a stumbling block to economic reforms and pragmatic economic policies.

In any case the tenure of the President is secure for the next three years and parliament cannot be dissolved for two and a half years. This provides a basis for adopting even unpopular but correct economic policies. It is the economy’s performance that would matter most at the next election.