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The post local government election period of political confusion, uncertainty and partial reshuffling of the cabinet last Sunday has demonstrated that the country’s leadership has no firm resolve to address the country’s critical economic issues. Consequently, the economy could be heading for an economic crisis.
The government must act quickly to implement economic policies that address fundamental economic issues and regain its popularity. It should not compromise on the needed economic policies owing to its paramount need to regain its popularity.

Cabinet reshuffle
The expectation that a new cabinet would demonstrate a strong resolve to be more effective has been dashed to the ground. The first phase of the cabinet reshuffle last Sunday, after over two weeks of political confusion, was like a reseating of one half of a school classroom after a recess. Political commentators have used far stronger critical comments on this shuffling of the pack. Not much is expected from the second instalment of the cabinet reshuffle in a few weeks.

No significant change
The response to the results of the local government elections has not led to either a reformation or a renaissance in the government. There is no indication of a firm resolve for effective governance. This is indeed bad news for the economy that has been plagued by political confusion and economic uncertainty. The unfolding political developments do not augur well for the economy, as political opportunism, political instability and uncertainty in economic policies are likely to continue and setback investment, especially foreign direct investment.

This year’s economic performance would depend heavily on political stability and the government’s capacity to pursue economic policies without political opportunism. Lack of consensus on economic policies in the government, political considerations being foremost rather than needed economic policies and irrational and unscientific decision making are likely to continue to the detriment of the economy. The political leadership of the country is unable to put the country before party and personal self-interest. A stable and more cohesive government with an agreed economic program effectively implemented is of utmost importance.

Obstruction
Emboldened by the better showing at the local government elections, the Joint Opposition (JO) is likely to step up its opposition and obstruct economic policy implementation. This could be a formidable drawback to economic progress in 2018 and 2019. Unlike in the past three years, firm action by the government to contain unjustified strikes and demonstrations is imperative.

Ineffective cabinet
One of the obstacles to economic performance is the inordinately large cabinet and the irrational allocation and combination of ministry functions. Many economic activities are bifurcated into several ministries. For example, agriculture, a key economic activity is in the hands of several ministers, deputies and state ministers.
The dysfunctional nature of this distribution of agriculture was vividly expressed by the former Chinese Ambassador to Sri Lanka at the Annual Congress of the Post Graduate Institute of Agriculture (PGIA) of the University of Peradeniya last November. He said China was committed to give a wide range of assistance for agriculture to Sri Lanka, but he did not know which minister he should contact. He said “You have so many ministers dealing with agriculture”.
The rationalisation of ministries would result in more effective formulation and implementation of economic policies.

Finance and Central Bank
The “reform” of the cabinet failed to address reassigning the Central Bank and banking to the Ministry of Finance. Nowhere in the world is the central bank of the country in any other ministry than finance. The anomalous nature of this is seen in that according to the Monetary Law Act, the Secretary to the Treasury is an ex-officio member of the Monetary Board. The current Secretary of the Ministry of Finance and Secretary to the Treasury is on the Monetary Board, but the Central Bank is not in his ministry. This change should have been made much before the reshuffle.

Macroeconomic fundamentals
There is every prospect of an undermining of macroeconomic fundamentals as political considerations are likely to guide policies to regain popularity. Foremost among the macroeconomic fundamentals that must be strengthened is fiscal consolidation. Policies that improve the external finances are also of utmost importance as the country has a huge debt repayment in 2019 and beyond. However some of the prudential monetary and fiscal policies are not likely to be adopted owing to their unpopularity.

Fiscal slippage likely
It is imperative that the fiscal deficit target of 3.5 percent is achieved in 2020 as fiscal consolidation is a prerequisite to achieve economic stability and growth. A deterioration in the government’s resolve and inability to achieve the fiscal target would jeopardise the country’s economic future. The implementation of revenue proposals in Budget 2018 and a more effective tax administration are essential to achieve a low fiscal deficit.

The political setback to the government at the local government elections is likely to weaken the government’s resolve to achieve a lower fiscal deficit. Imprudent spending to garner political support and popularity before the next elections could erode public finances. Fiscal slippages would hurt the economy. It is likely that public spending would expand in agriculture subsidies, rural welfare measures, salary increases and increased employment in the public services. If these were to happen and there were to be large increases in public expenditure, the fiscal deficit would expand and the stability of the economy will be undermined.

Economic imperatives
The strengthening of macroeconomic conditions are imperative for economic growth without which political popularity would be hard to achieve. These are likely to be threatened by short term and ill-advised public spending on handouts. This would also affect the external finances and reserves and aggravate the foreign debt servicing capacity.

Way forward
Political compulsions to increase expenditure, should be undertaken in tandem with countervailing measures to cut other expenditure and increase revenue.
Recent political developments make it politically expedient for the government to pursue policies that enhance its popularity. Economic policies that enhance the government’s popularity and are right economic policies that should be pursued. For instance, development of rural infrastructure, strengthening of agricultural research and extension and rational subsides for agricultural inputs would generate economic growth, decrease rural poverty and gain popularity. Higher expenditure on these and effective implementation of policies are economically and politically judicious. On the other hand, giving permits to import cars with reduced duties decreases revenue, increases imports and strains the balance of payments. Such policies may enhance popularity among a few, but undermines economic fundamentals and aggravates economic difficulties.

The government should have economic policies that enhance its popularity without compromising macroeconomic conditions. Cutting unnecessary expenditure is vital in the current fiscal and economic context to enable expenditure on economic and social needs that are politically and economically essential. There are several changes needed to enhance economic efficiency of the government. However it is unrealistic to expect these changes when political considerations are foremost, where party interests rather than national interests guide decision making and self-interest of leaders dominate.

Good economics is good politics in the long run. But then political leaders and political parties are not interested in the long run.