Mahoshada

Before hiring someone for a job, it makes sense to take a close look at what the job requires and then to determine how the relative strengths of the candidates measure up to what is needed. The same holds true in choosing a president.

The job description for president is, of course, very wide ranging. But one of the most important requirements is the ability to provide the leadership needed to effectively address the country’s economic challenges – in particular, bringing about a substantial reduction in poverty, the generation of large numbers of new jobs and maintaining conditions that will lead to steadily growing incomes throughout the economy. That the ability to handle economic issues is foremost in the minds of voters is borne out by the results of the recent CPA poll, discussed below.

It is, however, important that voters keep in mind that poverty reduction, increased employment and growing incomes are the end results of a series of actions and policies that determine the country’s economic environment. The president will be called on to give leadership and direction on a great many technical economic issues. Here, we briefly consider only several of the most pressing items relating to the effective management of the economy that will be waiting for the new president as soon as he takes office.

The CPA Opinion Poll
As the presidential campaign enters its final few weeks, the outcome remains uncertain. The highly respected Centre for Policy Alternatives released its “Pre-Election Opinion Poll” this week, which suggests that the race remains very close, with a substantial number of voters, some 25 percent, still undecided or unwilling to reveal for whom they intend to vote, (see www.cpalanka.org).

It is clear that the issue that matters most to the public continues to be the high cost of living. The CPA Poll indicates that about one-third of all voters consider this the most important issue in determining their vote. The second most important issue is the ability of the candidate to solve the ethnic conflict, which is cited by one-fourth of all voters. All of the other issues are seen to be much less important.

Interestingly, these same voters indicate that they have somewhat more faith in Ranil Wickremesinghe than Mahinda Rajapaksa to reduce the cost of living (41 to 35 percent) and to handle the peace process (45 to 39 percent). If these survey results are accurate and if voters behave rationally, both questionable propositions, then Ranil will be the next president. But polls are uncertain and voters often do behave irrationally, so it is likely that we will have to wait until the results are in before we can be reasonably certain who will be leading the country.

So, what urgent items will be waiting on either President Wickremesinghe’s or President Rajapaksa’s desk when they assume office in several weeks? In addition to the pressing post-election political questions and matters relating to the peace process that will demand much of their attention, the following economic issues must also be addressed.

1. The High Cost of Living
Given the importance of the COL issue in voters’ minds, the new president will find it imperative to focus on this from the outset. Success will depend upon bringing the rate of inflation down as quickly as possible as well as creating conditions that will be more conducive to expanding employment and increasing incomes. Reducing inflation will require actions on the budget (see next section), including steps that will reduce the deficit and slow the ‘printing of money’. But while these measures will take time to have a significant impact on prices and incomes, it is essential that things start moving in the right direction immediately.

Both candidates have promised that some immediate steps would be taken to provide a degree of relief through subsidies while more fundamental changes are being made. For example, Ranil’s manifesto calls for measures to hold constant the prices of several key commodities (milk powder, lentils and dried sprats), the introduction of the Siya Saviya programme for the poor and an extra month of pay for public servants. Mahinda’s manifesto is promising, for example, Rs 200 per month for milk for children, Rs 1,000 per month and further pay increases for public servants and a free midday meal for all children. There would be major administrative hurdles to be overcome in delivering some of these types of subsidies; immediate action will be required if these commitments are to be fulfilled in any meaningful way. For example, providing a hot meal to all children daily is going to be a huge financial and logistics challenge.

And while providing a degree of immediate relief to the poor is important, it is also essential that the costs of these programs be carefully controlled and waste and corruption be held to a minimum. The sad reality is that given the country’s heavy reliance on indirect taxes, it will be the poor and middle classes that are bearing most of the burden of meeting the costs of these programs that are ostensibly for their benefit.

2. The 2006 Budget
As this is being written, it is still unclear whether or not the current government will attempt to go forward with the presentation of a budget before the presidential election. A vote on the budget will in any case not take place until after the 17th November. The new president will undoubtedly be determined to make his mark from the beginning of his term, so it is to be expected that changes will be made.

High on the budget agenda for the new president, if he is serious about controlling the cost of living, is likely to be somewhat increased fiscal discipline. The high economic growth rates that both of the candidates say they aim to achieve cannot be reached running budget deficits of 8 or 9 percent, year after year, to fund recurrent expenditures (i.e., that are not for funding public investment).

Whoever is elected president must also face very difficult political decisions with respect to subsidy issues. Some new subsidies have been promised, while some existing subsidies will likely have to be altered. Both candidates are committed to expanding fertilizer subsidies. This will impose an additional burden on the budget. But the new president will also find it necessary to address the enormous cost of the ongoing fuel subsidies, reportedly costing the countries on the order of Rs 20 billion per year.

Contrary to much of the political rhetoric, these subsidies are almost certainly hurting the efforts to control the high cost of living as much or more than they are helping. At least during much of the last 18 months, much of what is being spent on subsidies is being generated through the printing of money, which has been fueling the high rates of inflation driving up the cost of living. Unfortunately, it is always politically much easier grant subsidies than it is to reduce them.

3. Tsunami Rehabilitation
The new president will assume office nearly eleven months after the tsunami struck the country. And as the recent Auditor General’s report makes clear, only minimal progress has been made in the extensive rehabilitation work required for the recovery of the affected communities along the coast. This is both an economic problem as well as a major management challenge. Enormous investment is required in housing as well as in restoring peoples’ livelihoods. For whoever assumes the office of president, rapid progress towards effectively meeting the needs of the people affected will be one of the first major tests of leadership. Success will lay a foundation for meeting the other great challenges facing the country. Failure will make achieving progress in other areas more difficult.

4. Managing and Mobilizing Donor Assistance
Sri Lanka will undoubtedly find it necessary to rely a great deal on increased donor assistance, at least for the next ten years, if many of the most critical investments in infrastructure are to be made and the additional financial and technical support needed for more rapid social and economic development is to be available. But at present substantial amounts of donor assistance are not being accessed. Examples include the poverty reduction programs of both the World Bank and IMF, which have been on hold since the beginning of 2004. (The World Bank continues to provide project related support.) In addition, the US Millennium Challenge Account, a potentially very large financial grant to the country, has yet to be agreed. There is, presumably, still considerable potential support available to the country through the $4.5 billion pledged to the country in Tokyo in June 2003.

However, most development assistance depends to some extent upon the country identifying and demonstrating the capacity to implement an effective program of economic reforms. To some extent this has been lacking under the UPFA government. Many tend to overlook the fact that the financial support pledged in Tokyo also depends upon making progress in the peace process as well as implementation of economic reforms. The new president will find it necessary to rapidly develop a coherent program of economic reforms if the country is going to be able to make use of the considerable assistance that is available.

5. Trade – WTO Ministerial Meeting in Hong Kong
The new president will not have the opportunity to focus entirely on domestic issues during the early months of his term in office. He will also have to quickly direct his attention to external economic issues. For example, very soon after assuming office, the country will be participating in critical talks as part of the WTO’s Doha Development Round. Success at this ministerial meeting in Hong Kong is generally seen as a critical step towards achieving the development goals of the round.

Given the crucial importance of international trade in the country’s economy, it is essential for Sri Lanka to support those measures that will provide enhanced trade opportunities whether through the WTO or through other channels. In addition to the Hong Kong meeting, it is expected that the SAARC South Asia Free Trade Agreement (SAFTA) will begin being implemented from the beginning of the year. Other trade agreements, including the Bay of Bengal group of countries pursuing the BIMSTEC free trade area and the Comprehensive Economic Partnership Agreement currently being negotiated with India are also likely to be high on the trade agenda for the new president. In addition, both of the major candidates have pledged to pursue new trade initiatives with the US and EU aimed at maintaining or expanding market access for the garment industry. The new president will be called upon to provide direction and leadership in pursuing these initiatives.

Leadership and Good Understanding of the Issues
These issues represent only the tip of the iceberg of what the new president will be facing on assuming office in shaping and implementing the country’s economic policies. Major challenges dealing with limitations in land and labour markets, the inefficiencies and distortions inherent in the existing tax systems, the cost and extent of regulations reducing competitiveness of all types of commercial activity and the enormous waste of resources through state enterprises must all be addressed effectively by the new president, if the country is to achieve the economic objectives that all sides say they want.

And this focuses only on the part of his job description dealing with the economy, excluding the challenges in addressing the ethnic and other political issues facing the country.

(The Sunday Island, 6th November 2005)