A coalition in transition?

Tuesday, 5 July 2016 00:01 -     - {{hitsCtrl.values.hits}}

Coalition governments have a history of being strange, complicated affairs and the latest Sri Lankan version has not fallen short of expectations. A rift between Prime Minister Ranil Wickremesinghe and President Maithripala Sirisen was evident last week over the Central Bank Governor appointment but could it have laid the groundwork for the President to become more involved in the economy? 

Hot on the heels of the appointment of new Central Bank Governor Dr. Indrajit Coomaraswamy came the announcement that Sirisena has called a meeting of the Inland Revenue Department officials to discuss the impact of recent VAT increases and possibly rework it to provide more relief to the public. It hinted at a strong U-turn from the previous status-quo where the Prime Minister together with his UNP ministers was largely left to guide the economic side of governance.   

 



The increase of VAT has by far been the most unpopular step taken by this Government albeit done for sound economic reasons. As the Government battles high debt, dwindling reserves, tenuous external situations, low exports and sustained deficits the only solution was to raise taxes to put the brakes on an overheating economy. It was also the only practical way to raise Government revenue as increasing exports and foreign investment are long-term goals. VAT increases, aimed at reducing consumption, will also likely slow down growth in the second quarter of 2016.

Economic growth in Sri Lanka was stable at 4.9% in 2015, although this rate remained much lower than the average growth rate of 8.5% during the period 2010-2012. One immediate policy challenge for the Government is to ensure a strong fiscal position and debt sustainability. While public debt reached 72% of GDP in 2014, the 2016 Budget suggests that the fiscal deficit would remain large at 5.9% of GDP.

The fiscal shortfall is due to both limited revenue collection, with the tax revenue-to-GDP ratio having been only 10.2% in 2014, and the country’s large expenditure burden. Unless tax reforms and expenditure rationalisation are implemented, fiscal conditions are unlikely to improve significantly.

 



One of the medium-term challenges is to transform Sri Lanka into a competitive export-led economy. To achieve this, the Government has fostered public-private partnerships and promoted liberalisation of the services sector. The need to enhance labor skills, diversify export markets, restructure loss-making State-owned enterprises and reduce infrastructure deficiencies will remain important. Development in these areas would help the country to attract more FDI and employment. Such a “to-do” list provides strong challenges for any political party.

Dr. Coomaraswamy in his inauguration speech noted the Government has to be shown that “good economics is good politics”. Focusing only on popularity could not only result in undermining the painful but necessary austerity measures needed for Sri Lanka at this point but worsen the situation by failing to implement sustainable and predictable policies essential for strong growth. The Sri Lanka Freedom Party (SLFP) and UNP enshrine different economic principles but now they have to find common ground in a restricted environment to ride out the current crisis.

More involvement by Sirisena could bring greater negotiation, stakeholder involvement, transparency and accountability to the economic agenda pushed forward by Wickremesinghe but consensus building could prove to be tough nut to crack. 

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