The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Can electoral politics be forgotten for the sake of economy?
The electoral victory of the governing party in the recent local council elections has raised hopes of political stability. The statement that there would be no more elections till 2010 is good news for the economy. Yet there is no certainty of this, as politicians like to strengthen their power when the time is ripe.

This is particularly so as the ruling coalition has some cracks in its partners' support. Especially the conditional support of the JVP in particular makes it difficult to pursue needed economic reforms as well the peace process on a pragmatic path. Nevertheless we hope that the elections have ushered in an polls-free period when economic issues could be faced in a realistic and pragmatic manner and economic decision-making can look at issues with a medium and long-term perspective rather than immediate political gain.

Unfortunately good economics is not good short-term politics. Consequently governments tend to follow policies that are popular for the present rather than what is good for the future.

If only this perspective could be changed by the fact that the President is in for a six-year term of office and the opposition is in disarray, then needed changes in recent economic policies could be trimmed and modified in the interests of the economy. That the Mahinda Chintanaya is good politics has been proven. Now there is an urgent need for the Mahinda Chintanaya to be brought within a framework of good economics.

A fundamental requisite for economic stability and growth is fiscal consolidation. What this means is that the current account budget deficit should be pruned to a much lower magnitude and over a medium term it should taper off. All governments have expressed this as an objective and aimed at manageable budget deficits in their budget speeches and other economic statements. Yet their actions have been to the contrary and deficits have remained high.

Consequently the public debt has risen over the years and distorted public expenditure. Successive governments have failed to reduce current and "unproductive" expenditure, thereby increasing the debt burden as well as creating a situation where developmental expenditure, such as the fund for infrastructure, is insufficient to support a higher level of economic growth.

If the government is to make a dent on this problem several measures are needed. There is a need to curtail a number of expenditures. The cost of the Samurdhi programme is a case in point. There is no doubt that the government must have an interventionist programme to ensure food security and basic needs for the poorest of the poor.

However when nearly one half of households in the country are beneficiaries of this programme, it is quite clear that the number of unintended beneficiaries is high.

What is worse is that the really needy do not get Samurdhi benefits. Surveys done by the Department of Census and Statistics and a study of the Institute of Policy Studies some time ago, have disclosed that a high proportion of those receiving benefits are not the intended beneficiaries and that on the other hand a significant proportion of the needy are not beneficiaries.

In a country where less than 25 per cent of the population is deemed poor, it is a mockery to find nearly half the population receiving such benefits and adding to the fiscal burden. The fiscal burden has been further aggravated by the energy pricing policies adopted by the government.

In the face of rising international oil prices, the government decided to not pass the burden to the customer. Consequently, the Ceylon Electricity Board and the Petroleum Corporation have been incurring huge losses that have to be met by the government. The immediate full impact has been cushioned by credit lines of US$ 100 million from India and another $100 million from Iran. This has also been a relief to the balance of payments for last year.

However, these deferred payments would strain the balance of payments this year. The reason for subsidising petroleum products is mainly political. The government may have staved off some political unpopularity, but the policy of subsidising petroleum means that customer response to the higher international prices is muted.

Consequently the country is importing more oil that the international price warrants. Now that the government is politically steadier, it should revise its policies and get back to the formula adopted earlier of adjusting consumer prices in accordance with costs of petroleum imports. If this is not done the fiscal deficit will continue to widen, import costs would rise and there would be a strain on the balance of payments.

The employment of 42,000 university graduates was another instance of fiscal imprudence. The costs of their wages and the increased costs of salary increases of public servants are leading to the situation where salary and pension payments may soon absorb nearly fifty per cent of government revenue. Even last year the wage bill of public servants absorbed about a third of the government expenditure and a higher proportion of government revenue.

While the government speaks of the need to reduce the budget deficit, it is taking measures that will increase it. The fundamental reason for fiscal imprudence is electoral politics that make political parties succumb to popular policies of subsidies that increase government expenditure.
Now that the President has an uninterrupted six year term and his party appears secure, he should look at economic policies in a new light with due consideration to medium and long- term growth. He should attempt to prune down expenditure that is wasteful, undertake the needed reforms in pricing policy and reform public institutions to ensure that they do not continue to be a burden on the public.

Unless these are done, the country's international financial ratings would dip, the IMF and World Bank concessional loans would dry up and consequent resort to commercial borrowing would be at higher interest costs. This would in turn increase the foreign debt and public debt that has been hovering around the level of the GDP.

Bold economic reforms and policies are needed if the country is to achieve higher economic growth. Electoral politics has been the root cause of governments following politically popular policies that have aggravated fundamental economic problems.

Economic reforms are shelved and poor economic policies are pursued to please people. Can the Mahinda Chintanaya be brought within a framework of good economic policies? Is there the requisite political courage to face up to the economic realities now that the government has got a further mandate?

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