Sri Lanka local polls risk to economic reforms
ECONOMYNEXT – Sluggish economic activity and higher consumer prices from drought could prompt the government to go back on reforms ahead of local government elections this year, a private sector economist told a Ceylon Chamber of Commerce forum.
Recent reforms had improved economic stability although business sentiment was still not too optimistic, said Deshal De Mel, Head of Business Development at Hayley’s Global Beverages, part of the Hayleys conglomerate.
“Higher taxes, interest rates and a weaker rupee could have a detrimental impact on economic activity, and
slow down investments, company expansion and consumption, he told the forum on the economic outlook for 2017.
“There are so many factors that will depress economic activity in 2017 with drought impacting it further,” De Mel said.
One of the biggest concerns were the political ramifications of slower growth given this year’s local government polls.
“If economic conditions are down – economic activity and incomes – and possibly higher prices from drought – those factors will play a role in the potential outcome of the elections,” he said.
“So the government might be tempted to roll back the gains we’ve seen,” he said, referring to concerns that the government could increase spending and roll back tax hikes imposed to raise revenue if it fears becoming unpopular ahead of the polls.
Such a turnaround will have a negative impact in international markets, De Mel said. “In future, if there’s more government pressure on the central bank to ease up on allowing the rupee to depreciate, interest rates to go up – then we’ll see slippage on interest rate and rupee discipline which will affect domestic economic stability.
”So political developments are crucial.”
The International Monetary Fund program with Sri Lanka was also a concern from a “political economy perspective,” De Mel said.
The initial tranches of the IMF program were based on straightforward revenue measures which “don’t have significant political baggage,” De Mel said.
“But later, you get more politically loaded reforms such as on state owned enterprises and trade liberalisation. It would be much more difficult for the government to get these reform pushed through.
“If we have a delay in reforms and IMF tranches being disbursed, the signalling impact on capital markets is going to be negative.”
(COLOMBO, Jan 27, 2016)