Financial Times

Mixed signals on mixed economy
The UPFA government's unveiling of its economic policy framework and announcements of impressive growth figures for the first quarter of this year appears to have done little to clear the doubts of investors and the private sector. They still appear confused and harbour fears about the lack of clarity of the new government's intentions and how it plans to find the money to fund the vastly increased expenditure envisaged if it is to fulfil all its election promises.

The latest announcements have not added anything really profound to what we already know about the UPFA's economic policy, except perhaps to flesh it out a bit more. The detailed programmes would have to wait for the government's first budget which would be presented towards the end of the year.

But the business community is concerned about what appears to be mixed signals emanating from the government about its commitment to a free market economy. To be sure, the government, even before being elected, spoke of a 'mixed' economy but also made noises about being broadly in agreement with the free market policy thrust of its predecessor and giving the private sector its chosen place. The differences appeared to be a matter of degree.

What now appears to be causing confusion and worry are references to price controls and caps on profit margins. These seem to be somewhat draconian measures to adopt in a free market economy, especially one such as ours that is struggling to survive in a hostile economic environment. The business community is obviously worried that such signals might scare off foreign investors and even discourage local entrepreneurs who naturally would not want too many controls over the way they do business and the amount of money they make.

While the government is concerned about preventing the exploitation of consumers by unscrupulous businessmen, the private sector would not want too much interference in the employment of private capital.

The government has to strike a fine balance between these two requirements.
The consensus of opinion among investors and economists appears to be that the real story will emerge after this month's provincial council elections and that the people would have to swallow some unpalatable medicine then. They anticipate price hikes in a range of items starting with petroleum products. This, in all probability, will have an across-the-board effect, triggering price hikes in other products as well, and fuelling inflation.

Already, there are expectations of higher inflation, despite government pronouncements that it will do its best to keep the lid on inflation and maintain a low interest rate regime. The budget deficit is also expected to widen and the rupee to depreciate further while foreign exchange reserves are falling.

Keeping inflation in check is crucial for the government to maintain its popularity. Likewise, a low interest rate regime is critical for private sector growth as entrepreneurs need access to cheap funds.

The previous UNF government must be given the credit for bringing down both inflation and interest rates. This government is unfortunately caught in an unfavourable international economic environment with skyrocketing crude oil prices and higher prices of other important commodities like wheat.

If oil prices remain as high as they are the government is unlikely to be able to maintain the current oil price subsidy for much longer given its already creaking finances. Hence, the speculation of a petroleum price hike as soon as the PC polls are over.

The government is also being devious and even hypocritical about the impressive first quarter growth figures announced by the Central Bank. The UPFA cannot take the credit for these figures for they are the results of the former UNF regime's macro-economic management.

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