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As a new parliament has been elected with a two-thirds mandate, the new government’s economic policies will be of paramount importance for the nation’s future.

Policies

The new government’s policies to resolve the formidable economic challenges of the country would be of pivotal importance to achieving economic stability and growth. Described as “knife-edged” by the International Monetary Fund (IMF), the current economic recovery requires financial discipline, fundamental reforms, pragmatic economic policies, and effective implementation.

This is a huge challenge in the context of the promises given, the expectations of the people, and the state of the economy. The global context may also present challenges for the economy.

The Janatha Vimukthi Peramuna-led National People’s Power (NPP) won more than two-thirds of the parliamentary seats. The victory has a significant impact on economic policies and their implementation.

One could be cynical and say that whoever forms the government does not matter; whoever administers the country best is the best.

Challenges

The economic challenges for the government include foreign debt repayment, reducing the fiscal deficit, ensuring economic growth, reviving agriculture and industry, increasing employment, containing prices, reducing poverty and malnutrition, and improving the country’s external reserves.

Each of these challenges is formidable; all of them are daunting.

Appropriate

All these cannot be achieved immediately or completely, but the initial policies to achieve them have to be taken expeditiously. The adoption of appropriate and pragmatic policies is most important. The government must adopt economic policies to resolve economic problems rather than ideological and inappropriate policies.

Difficult to fulfill

The promises given to the people and the expectations generated in the run-up to the elections are difficult to fulfill. For instance, increasing public servants’ salaries, though just and equitable, is financially imprudent and will undermine fiscal consolidation, which is vitally important for economic stability and growth.

Privatisation

Recently the President said he would not privatise state-owned enterprises. The government has also decided to not privatise SriLankan Airlines, which is a huge burden on the public finances.

The failure to privatise loss-making enterprises will render fiscal consolidation more difficult. Similarly, other allocations to fulfill election promises could undermine fiscal consolidation.

Expenditure

On the other hand, the reduction of wasteful and unnecessary government expenditure was a correct step in the right direction. However, these savings are much less than the committed expenditures on salaries, pensions, debt servicing costs, and the defence budget. Therein lies the problem.

Fiscal consolidation has to be achieved by a two-pronged strategy of increasing revenue and reducing expenditure. Both are difficult to achieve.

IMF agreement

The main hurdles are the continuation of the agreement with the IMF and the continuity of the Extended Finance Facility (EFF) that has stabilised the economy to some extent.

During the presidential election campaign, the NPP said it would abrogate the agreement, but after the election took a more conciliatory position of renegotiating the conditions to ease the burdens on the poor.

Dilemma

The problem confronting the new government is how it could propose a modification of the conditions without agreeing to the fundamental macroeconomic targets and objectives. This is especially so as regards the government’s decision not to privatise state-owned enterprises, its commitment to increasing salaries, enhancing social security, subsidising fertiliser, and increasing expenditure on health and education, and increasing salaries of public servants while reducing taxes.

This is indeed a task for a magician, not a president and a government of the people.

Governance

In contrast, the new government led by President Anura Kumar Dissanayake is likely to implement good governance conditions much more effectively than the previous Wickremasinghe administration, despite difficulties. The new government is likely to implement the IMF’s recommendations on eradicating corruption and conforming to the good governance requirements.

External conditions

Unfortunately, the economy is likely to face severe shocks from global economic conditions. The trade war between the United States and China and the prospect of increased tariffs on Sri Lanka’s manufactured exports could worsen our trade balance as the US is the most important export market for our manufactured exports, especially garments.

International tensions

Furthermore, the international tensions and ongoing wars in West Asia could increase the import costs of fuel, fertiliser and food. Remittances from West Asian countries could decline steeply.

International tensions could also affect global travel and tourism. In brief, the external environment could give significant shocks to the trade-, remittances-, and tourism-dependent Sri Lankan economy.

Let us hope that the changes in the US presidency will somehow reduce international tensions and that external shocks will not materialise.

Conclusion

Achieving economic stability and growth is no easy task owing to the state of the economy and political compulsions. The government must adopt pragmatic policies rather than give in to populism and unworkable ideological policies. There is some evidence that the government would follow market-friendly policies and intervene to resolve economic problems confronting the country when needed.

The road to economic stability and growth is strewn with difficulties. Election promises are difficult to fulfill. Now that elections are over and the government has received a massive mandate, parliament must work towards a national economic consensus.