The current political unrest and tensions will impair the country’s economic development. At the end of the war there was every prospect of the economy being revitalized and developed. There was a strong expectation of a trajectory of rapid economic growth. What happened was different. The country is in a state of confusion with each day bringing fresh concerns of instability and uncertainty. Initially the calling of the Presidential election two years before the scheduled end of the President’s six year term of office delayed that hope. An attitude of wait and see developed with respect to economic decision making.
The electoral contest that occurred not merely distracted and disrupted the economy, but added a new uncertainty about the country’s future. While the elections put on hold some of the economic programmes, the private sector and foreign investors had expectations of economic development after the elections irrespective of the election result and whether there would be a change in regime. The buoyancy in the stock market that rose to unprecedented levels was indicative of these expectations.
There was no setback of significance to the economy up to the elections even though investors adopted a wait and see attitude. It is the post election period with its charges and counter charges, demonstrations consequent to the arrest of the opposition’s presidential candidate and the chaos and uncertainty on the political front that has now emerged as a serious threat to the economy. The unrest in the country has created an atmosphere quite detrimental to the economy. The general elections scheduled for April will also mean that positive developments for economic growth would have to await the new government taking office.
 |
These conditions will affect the economy in several important ways. Three areas that are likely to be affected are foreign investment, especially foreign direct investment in industry and services; tourism and industrial exports. These are three vital sources of economic growth. Of these three perhaps the inability to attract adequate investment would hamper the achievement of the high rates of growth that was expected. The perception that Sri Lanka is an unstable country would hamper foreign investment and tourism.
Foreign investment is vital for the country’s rapid economic growth as there is a wide domestic savings investment gap for higher rates of growth. The current level of national savings that includes the important contribution of foreign remittances are inadequate to get economic growth rates of 8 to 10 percent that is the ambitious target of the government.
There is a need to triple foreign investment to enable the country’s investment to be around 35 to 40 percent of GDP from its current level of more or less 25 percent of GDP as an annual average. Foreign investors are not likely to invest in long term projects as long as there is an overhang of political turmoil and unrest. We can only hope that this would be a short period of uncertainty and that once the parliamentary elections are over, there would be stable conditions that would create the climate for rapid development.
Already there are signs of foreign investors in the share market pulling out. The net outflows of capital from the Colombo Stock Exchange have been significant. What is true of foreign investors is applicable to local investors as well. They too would ted not to commit large funds for investment till the political clouds clear up. The political volatility during the post presidential election and pre-general election period could only do harm to investment decisions.
In this context of political instability, unrest and tensions, the government’s decision to free the capital account may prove unwise. Even at the best of times, such liberalization of the capital account did not seem a prudent measure, as many Sir Lankans would prefer to move their capital to more stable economies of Europe and America and several stable and prosperous Asian countries. Besides this, there was a large number of expatriates who had big sums of money in “blocked accounts”, who would surely take their monies to the greener pastures they have migrated to?
Tourism is the other sector that is likely to suffer. For the past three decades the tourist industry that looked a promising one till 1983 faltered owing to the ethnic violence, LTTE terrorism and war. Those seeking a holiday are unlikely to choose a location where there is a prospect of being caught up in violence. The experience of other countries like Egypt, Indonesia and Thailand bear this out. Considering the extent of violence in the country in the past one is surprised at some degree of resilience in the hospitality trade after a series of setbacks since 1983. Just when there was a real prospect of revival and the first signs of such a revival were evident, the elections and post election violence have once again been a setback to the industry. Attaining the short term goal of a million tourists may now take more time till peaceful times return once again.
The third concern is with respect to the country’s exports. The last few years have seen a declining trend in exports especially industrial exports. Industrial exports are now facing the prospect of losing the GSP Plus concession. This was so before the end of the war and fortunately there has been a postponement of the withdrawal of GSP Plus by the European Union countries. Now there is a much greater prospect of its withdrawal. Such a withdrawal would be serious for many industries that have to compete with other countries in the region that will continue to enjoy this privilege.
Political stability and peaceful conditions are vital for a strong thrust and acceleration of economic growth. The quick return to peaceful conditions is vital to achieve the stipulated economic targets of increased per capita incomes, increase in employment and reduction of poverty to low levels.
Those interested in the economic development of the country would hope that political sanity and stability will be achieved shortly.
Several economists have described the post independent economic experience of the country as one of lost opportunities. The end of the war and the elimination of terrorism was a wonderful opportunity for the country to develop fast in spite of many challenges. Have the events of the last several months turned such promising conditions into another lost opportunity? Let this not happen again. |
E-mail