A nudge out of limbo

Political uncertainty is not good for business. This is why election years are particularly tricky because in addition to dealing with the usual amount of challenges governments have to convince companies that it is a good idea to expand their businesses. In a climate of potential change navigating the different variables becomes even more challenging and companies understandably prefer to ride out the period. This is why policies will have to be decisive to push the private sector out of their wait-and-see approach and into new investment.

The latest LMD-Nielsen Business Confidence (BCI) poll reveals that in the eyes of a majority (55%) in the corporate community, the economy is likely to deteriorate in the next 12 months. However, 45% of those spoken to say that economic conditions will ‘improve’ or ‘stay the same’ during this period.

In terms of business prospects, 32% and 24% of businesspeople consulted by Nielsen expect sales volumes to improve in the long – and short – terms respectively, compared with 50% and 34% in the previous month. 

This neither here nor there sentiment is understandable given that the Budget has just been passed and public expenditure generally increases in an election year so here will likely be demand-led consumption boosting the economy.

In addition, several sectors such as tourism and construction that have been consistently strong industries will likely continue their growth as they are resilient and the least likely to be affected by politics. Travellers, generally pre-book their visits and are unlikely to change their minds unless something serious happens and people will always need shelter so construction, especially in the middle income segment will continue to grow. 

Several Budget schemes such as Gamperaliya, which aims to improve village level infrastructure and Enterprise Sri Lanka are also likely to funnel funds to the construction sector. Ongoing and new State-backed infrastructure projects are also likely to escalate as polls get closer. Therefore, it is clear that already strong industries will continue to expand.

Exports are also likely to see a moderate growth as seen in the last six months. Sri Lanka’s traditional markets are likely to continue their growth, especially since the UK has already announced it will keep the GSP+ scheme even in the event of an exit from the EU.     

But the biggest challenge will be in getting other sectors to invest, encourage new businesses, and implement reforms that are needed to make the economy for efficient. Key among these is reforms of State Owned Enterprises (SOEs), which is also one of the largest vote bases for the Government and therefore and change so close to an election could carry serious repercussions. Both sides of the political divide are strongly wooing the public sector with car permits and salary increases already promised and legislative and other reforms are unlikely to be met with open arms.

Given that Sri Lanka has always struggled to raise public revenue and additional taxes would be a bad idea in an election year, the best policy for the Government at this stage is to spend better, reduce corruption, wastage and mismanagement to move as close as possible to the targeted Budget deficit. Maintaining macroeconomic stability may encourage businesses to then go out and invest and it would also assist in raising funds for debt repayment.