Columns

The expectation of a presidential election next year has created considerable confusion and uncertain-ty in the country.  This is not conducive to the country’s economic stabilisation and reforms and conti-nuity of economic policies that have been recently introduced and envisaged. Whatever the outcome of the election, the confusion and uncertainty have been a serious setback to economic stabilisation.

Politics

Political parties are of the view that a presidential election is likely early next year. Whether this would happen or not is not the issue. What is significant to the economy is the considerable uncertainty that such an expectation has created.

Convulsions

There are convulsions within political parties as well as new party formations and affiliations. How these would work themselves out and how many candidates and parties would contest the next elec-tions is anybody’s guess at this point in time.

Economic policies

How does this uncertainty affect the economy? One of the main ways in which the current situation would affect the economic stabilisation programme is the uncertainty in its continuation post-election. Several parties have expressed their antipathy to the International Monetary Fund’s (IMF) pro-gramme. Some have rejected it completely. Others have rejected parts of it. This is particularly so with respect to privatisation of state-owned enterprises.

Impact

One of the impacts of such doubt and uncertainty is that international credibility is eroded.  This may impact the foreign assistance that is expected.

Furthermore, an impending election implies promises made by parties. It is most likely that several parties would make the IMF programme a key cause of opposition. They would probably say they will reject the programme outright.

The danger lies in the popular minds’ perception of the IMF causing hardships. Some even call it an imperialist institution that weakens our economy.

The Sri Lankan people have little understanding of the function and the role of the IMF. It is clear that the country’s economic stabilisation cannot take place without the IMF’s Extended Finance Facility and the many reforms it has suggested including the privatisation of state-owned enterprises, elimination of corruption by adopting transparent methods, and the increase in revenue to bring down the fiscal deficit significantly.

Privatisation

One of the biggest reasons to oppose the IMF reforms is the privatisation programme.  The public no-tion that we are selling the nation’s wealth or family silver is embedded in people’s minds. They are not mindful of the severe cost incurred by these enterprises. Even state-owned enterprises that are not loss-making could be more profitable if they are managed by private entrepreneurs. The fact that these enterprises are a huge cost to the people and the population at large and have to bear the loss-es by higher indirect taxes and inflation is little known or appreciated.

On the other hand, the notion that the sale of SOEs to private entrepreneurs is a huge loss to people is popular.  There is no doubt that election manifestoes, political promises and slogans would undermine the current economic programme.

Optimism

Although the expectation of a more sober programme by the main parties is somewhat optimistic in the current political milieu, we cannot reject the possibility that some of the main political parties would in the national interest accept a pragmatic approach to economic policies. Such an optimistic scenario would require the main parties to accept the continuation of the current programme, given there is no effective and pragmatic solution to the current economic crisis.

We should live in the hope that the main political parties would adopt a stance that they would contin-ue with the current policies with some modifications. One could describe such a programme as “struc-tural adjustment with a human face”. What this implies is that while the contours of economic policies remain as those of the IMF programme there would be some changes to their implementation.

Taxation

An example of such a programme would be that the taxation of incomes at the lower end would get some relief. Similarly, burdens that fall on the poorer segments of the population could be relieved to an extent. There appears to be some recognition that this would be so and the recent revision of the electricity tariff is one such measure.

These concessions do not mean that overall revenue to the government should be impaired.  What-ever revenue is lost by such adjustments in revenue proposals must be offset by increased revenue on affluent consumption.

Indirect taxes

Previous columns have suggested the imposition of higher taxation on what economists call conspicu-ous consumption. In other words, expenditure taxes should be introduced on items of luxury con-sumption.

Such taxes would not only increase revenue but curtail unnecessary expenditure and rectify to some extent the widespread evasion and avoidance of taxes.  It is well recognised that one of the reasons for the country’s low revenue-to-GDP ratio of about 8% of GDP is due to tax evasion and avoidance.

Summary

The current confusion caused by the prospect of an early election could create uncertainty in the im-plementation of the IMF programme and delay economic reforms. It is vital for political parties to take a realistic view of the economic crisis and recognise that the only way to economic recovery is by the effective implementation of the IMF programme and its suggested reforms. This, however, is an op-timistic expectation in Sri Lanka’s political culture milieu and behaviour.

Concluding reflections

The period before the next elections should be one of much greater political responsibility by parties. Will it be a turning point in the nation’s politics or would it be another period of pandering to popular emotion and derailment of economic stabilisation?