Authored by Dr. Sirimal Abeyratne, Prof of Economics, University of Colombo for The pathfinder Foundation

When we look at the developments in the economic policy arena after the Presidential elections, we hardly see any way forward for Sri Lanka. Apart for revisiting governance issues, what we find is policy actions that were “defensive” and “corrective” in form but is “destructive” in substance.

When I bring this to the notice of others what I hear is that “The government is now focused on the 100-day programme; and therefore, we are to wait and see how things change after that”. Surprisingly, no one seems to understand that what the government does from day one will impact the country, beyond the 100 days. 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.

Introduction

Every election in Sri Lanka has been contested by all parties on populist policies. Every government formed after the elections implemented unviable promises during their first few months. They hoped that they could find revenue and cut expenditure by eliminating waste and corruption. Invariably, they later faced hard realities within the domestic as well as the global setting and were compelled to reverse actions taken to fulfill election promises. This democratic process has ended up with fiscal deficits annually and has resulted in high levels of both domestic and foreign debt. This, in turn, demands high debt servicing from the annual budget. The government deficit increases aggregate demand in the economy. This pushes up demand for both imports and domestic goods and services which, in turn, creates inflation as well as exchange rate depreciation. The government borrowings also reduce available credit to private individuals and businesses and hence push interest rates up. These domestic macroeconomic trends are becoming increasingly played out in a context where countries are integrated to global trade, tourism, and labour markets as well as capital movements and financial transactions. This means that national economic sovereignty is becoming increasingly diluted in the modern global economy. This increases the importance of disciplined economic management as countries become more exposed to international markets.

The Pathfinder Foundation (PF) since its inception in 2006 has been in the forefront in advocating closer and much more liberal trade and investment relations with an expanding Indian market. In this connection, the Foundation has commissioned several studies on opportunities arising from deepening of the existing FTA with India leading to a Comprehensive Economic Partnership Agreement (CEPA).

In order to realise the full benefits of the economic relations between any two countries the PF believes that barriers (tariff and non-tariff) must be removed in trade in goods and services. Since the beginning of the PF’s advocacy program the political landscapes of both India and Sri Lanka have changed considerably. Notwithstanding these changes it is heartening that the new Indian leader, Prime Minister Modi, has come forward emphasising the mutual benefits of signing of a CEPA between the two countries.

Prime Minister Modi made some important observations at the event for the business community organised by the Ceylon Chamber of Commerce (CCC). These comments provide important insights into how Sri Lanka can increase the economic benefits of increasing its engagement with India.