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Sri Lanka 100-day program can create long-term economic damage: policy paper

Apr 02, 2015 07:19 AM GMT+0530 | 0 Comment(s)

COLOMBO (EconomyNext) – Though there are hopes that economic policies that will bring true benefit to the people will come later, the damage created during a short-term 100-day program will have long-term negative consequences, a policy paper has warned.

The 100-day program of the current administration has a strong focus on governance issues agigated for many years by civil society organizations, such as reducing the arbitrary powers of the president and other elected rulers to improve rule of law.

Improving the independence of the judiciary and the public service to allow them treat all citizens equally and justly so that the elected ruling class cannot discriminate or mistreat them and deny justice is also a key election promise.

Apart from revisiting governance issue, many policy actions of the 100-day program are 'destructive' in substance, an economist has warned, with many people waiting until after the program ends to see whether things would get better.

"Surprisingly, no one seems to understand that what the government does from day one will impact the country, beyond the 100 days," Sirimal Abeyratne, Professor of Economics at Colombo University wrote in a policy paper by Pathfinder Foundation, a Sri Lanka-based think tank.

"After 100 days it may be too late to correct the negative repercussions of our policy blunders as they may be irreversible at least in the short-run."

A pre-election budget for 2015, prepared by the last administration had many giveaways with unanswered questions about how they would be financed, and in a defensive strategy to counter the move, promises were increased in a revised budget this January.

"The amended budget prepared under the new regime got locked up in the trap fabricated in the previous budget," the paper said.

"Assuming that the political challenge could be avoided and that the popular validity of the previous budget could be nullified in the same way, the same promises were inflated many times over in the revised Budget.

"Estimated recurrent expenses increased even more against a declining government revenue. This decline seems to be more than what was estimated in the revised Budget."

The revised budget did not have anything about policy directions but instead sent negative signals damaging long-term investor prospects of the country.

"In fact, the budget confused and frightened investors who were anticipating business-friendly policy directions from the new government," the paper said.

Economists and others have expressed shock at a retrospective and large one-of taxes including those targeting telecoms- which while generating revenues and probably helping reduce money printing and currency depreciation – violated rule of law by undermining predictability and justice.

Large one-off taxes especially some which can kill companies, also violated global time-honoured taxation principles dating back from ancient times.

Meanwhile Abeyratne said the new administration has started to dig into wastage and corruption associated with the last regime including some large infrastructure and foreign direct investment projects, but they may also result in more costs.

"There is no question of investigating into wastage and corruptions within the premises of law and order of the country or re-negotiating terms and conditions of the projects under concern," he said.

"Yet bringing the ongoing projects to a state of standstill will have far-reaching negative consequences on investor confidence and economic growth prospects. 

"The direct economic cost of abandoning infrastructure projects include:  public or private investment foregone, possibility of claiming compensation by investors and other funders, and their direct economic benefit to the economy that is foregone."

Despite adopting market-friendly policies and sweeping tax holidays, Sri Lanka has failed to attract significant levels of foreign direct investment projects.

Abeyratne pointed out that the size of FDI inflow does not depend on the size of the country or the population wit Singapore drawing over 60 billion dollars, while India attracts about 28 billion dollars.  Malaysia and Thailand raise over 12 billion dollars and Vietnam about 10 billion dollars a year.

"Although the problem of the lack of FDI inflow was attributed to the country’s 30 year conflict, it did not turn around even after the dawn of peace," Abeyrante notes.

"This shows that Sri Lanka has a structural issue that needs to be corrected with respect to the establishment of a business-friendly policy and political environment.

"Yet the measures taken and signals transmitted during the 100-day period seem more damaging than restoring the country’s investment climate.

"The objective of sustained growth and prosperity needs to be achieved through the adoption of prudent economic policies.

"A mature people-oriented leadership has to make decisions to serve a larger interest of the people without considering the petty interests of a select group."


 

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