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Never before has a local government election had as much implications for the economy as that of February 10th. The run up to the election and the defeat of the two parties forming the government have resulted in political uncertainty, political instability and erosion of confidence in the coalition government.

These would deter investment, weaken the capacity of the government to take bold and essential decisions needed for economic stability and growth. The opposition’s obstructionist activities may escalate and cripple the economy. The emerging political developments will have far reaching economic consequences.

Political developments
The significance of the local government elections was owing to it being the first time that elections to all local bodies were held on one single day. This conferred on the election the status of a mini election or a referendum. The political rhetoric of all parties transformed it into a national referendum. In fact issues regarding the governance of local government institutions hardly figured in the election.

It was also the first time since the election of the government and President three years ago that the popular perception of the government could be gauged. The importance lay in the fact that it was a test of popularity of the coalition of two parties that have been hostile to each other.

Election campaign
The run-up to the election mattered as much or more than the final result. It disrupted the cohesion of the unity government, distracted the government’s attention to individual party concerns and created enormous uncertainty and political instability. These adverse impacts were despite the political realities and constitutional constraints ensuring the continuity of parliament and the “unity” government for another two years.

While the leaders repeatedly boasted of their achievement of unity of the two main parties, at the grassroots level the supporters of both parties were against the other coalition party. Consequently the leaders criticised each other to muster party support and inadvertently buttressed the breakaway group of the SLFP, the Sri Lanka Podujana Peramuna (SLPP) led by former President Mahinda Rajapaksa.

President Maithripala Sirisena went to the extent of saying that he would form a government without the UNP in spite of it being a political impossibility given the strength of the UNP in parliament and the much smaller number of SLFP members of parliament with him. It was also a significant election as the defeated President Rajapaksa was opposing his own SLFP by forming a new party, although he had not resigned from the SLFP. It was therefore a test of popularity of two factions of the SLFP: a contest between Sirisena and Rajapaksa.

Economic disadvantage
The election was a backward step for the economy. It weakened the government’s unity and cohesion, created uncertainty in economic policies, distracted the government from its economic programme and perhaps eroded international confidence in the country’s economic prospects.

The resounding defeat of the SLFP weakened the authority of the incumbent President. There is no doubt that President Sirisena’s presidential authority has been eroded to quite some extent though his constitutional authority remains intact. There may be doubts about his contesting the next elections. The results also imply that that there is little support in the SLFP for the coalition. President Sirisena himself is responsible for this erosion as he campaigned against his coalition partner and even repeatedly said he would form a government without the UNP, although this was impossible as the SLFP had so few members of parliament, while the UNP was short of only seven members to secure a majority. The Sirisena political rhetoric weakened the coalition, strengthened the SLPP and eroded the political stability of the coalition.

Economic performance
Despite the under performance of the economy, inadequate and ineffective implementation of policies, weak action on preventing economic disruption, accusations of bribery and corruption, continued nepotism and slow economic growth, the government has had significant achievements that were conducive for economic development. Chief among these is the considerable improvement on law and order and the rule of law that are fundamental prerequisites for economic development. The improvement in international relations have increased export prospects.

The singular achievement in this respect has been the restoration of the GSP plus status in by the European Union (EU). Consequently exports of sea food and garments have expanded and total exports reached US$ 15billion, a record high.

After lapses in fiscal consolidation in 2015 and 2016, there was a significant reduction in the fiscal deficit in 2017 and the achievement of a fiscal deficit of only 3.5 percent of GDP in 2020 was in sight. The recent political developments may jeopardise this essential objective for economic stability and growth.

There was a clear cut programme and strategy for foreign debt management. This strategy is likely to face difficulties if the trade deficit increases, investment inflows reduce, borrowing cost rise and the rupee depreciates. The critical issue is whether these achievements would face a setback owing to the political uncertainty that has crept in.

Economic implications
The current political situation would erode confidence among foreign and local investors, lower the country’s credit rating and increase foreign borrowing costs. The capacity of the government to take vital decisions to reform the economy would be vitiated and perhaps abandoned. Economic growth that has barely touched 5 percent since 2015 will likely slide owing to these adverse developments.
The eventual economic outcome would however depend on the manner in which the government faces the political predicament, the composition of the “new” government and its resolve to implement the right economic policies. The government should take bold economic decisions irrespective of popularity and political opposition realising that good economics is ultimately good politics. It would also be required to adjust its economic policies to benefit the large rural populace.

In conclusion
All things considered, the run-up to the local government elections, the election campaign and the ensuing political uncertainty and instability are adverse developments for the economy. The economic challenges before the government are formidable. It is vital that a sturdier coalition government is formed with a well-structured economic policy and a firm will for strong governance to ensure that the economic gains that have been achieved are not frittered away.

National economic development rather than political party gains should mould the actions of both the government and opposition. The country is now at crossroads where false steps could lead to economic retardation in an Asia that is marching forward rapidly.