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Ailing economy a key test for new government in Sri Lanka

Chamath Ariyadasa

Colombo: Putting Sri Lanka’s ailing economy on a firmer footing will be one of the main challenges facing the island’s new government, economists said on Monday.

That includes immediate work on putting a budget in place for 2002 with measures to cut a bloated budget deficit, they said.

“I do not see a budget this side of February,” said Arjuna Mahendra, chief Asian economist at Forecast Pte, a subsidiary of British-based research firm 4 Cast.

Expectations of a better economic environment have risen since the pro-business United National Party (UNP) won a decisive victory in last week’s parliamentary election.

The stock market voiced its immediate approval by jumping more than 25 per cent in two days of trade on investor happiness that the UNP and a Muslim ally would be able to form a majority.

This ends a year of political uncertainty as the outgoing People’s Alliance scrambled to patch together its minority government.

Economists said the budget for 2002, due by the end of the month, needed to be drawn up soon with ways to trim the heavy deficit — and implement capital expenditure projects that aid development.

“It is going to be a tough task,” said Saman Kelegama, chief economist at the Institute of Policy Studies, a local think-tank.

The economy is expected this year to register its slowest growth in 30 years at under 1 per cent, which has affected government revenues, while heavy losses at the state-owned Petroleum Corporation and the Electricity Board have also taken a toll.

Economists said that points to a higher budget deficit than the government’s official forecast of 8.5 per cent of gross domestic product, possibly exceeding 10 per cent.

Rising war costs and prices for imported fuel left the government with a budget deficit of 9.9 per cent of GDP in 2000 even though there was solid growth in exports, especially for garments.

The UNP is expected to announce a new cabinet in the next few days and new Prime Minister Ranil Wickremesinghe has said he would consult other parties before forming the Cabinet.

“A move towards consensual politics is a good sign,” Mr Mahendra said.

The recent political turmoil has left a balance-of-payments support agreement with the international monetary fund, crucial for increasing the country’s foreign reserves, in disarray after the government signed a $253 million loan programme in March.

“A stable government can now give the economy priority status,” Mr kelegama said.

He said renewing the IMF pact would be needed to boost foreign reserves, at $1.2 billion at the end of September, to a “comfort zone” of $1.5 billion.

Economists said finding a solution to an 18-year ethnic war with rebels, demanding a separate state in the North and East of the country, was also needed to ensure an economic rebound. (Reuters)