DailyMirror
Sri Lankan President Mahinda Rajapaksa and his challenger, former army chief Sarath Fonseka have laid out their plans to revive Sri Lanka’s economy after a 25-year war both men lay claim to winning. Here are some questions and answers on what kind of economic policies investors can expect from the winner of a Jan. 26 presidential poll:
WHAT ARE the KEY FEATURES OF THEIR POLICIES?
Both have laid out promises, like most presidential aspirants in recent Sri Lankan history, of salary hikes for 1.2 million state employees, subsidies and other handouts.
Rajapaksa has pledged to turn Sri Lanka into a global hub, with heavy investments in aviation, energy and ports — including a massive Chinese-financed one under construction in his home district of Hambantota. His policies have mainly focused on rural areas, where his strong vote base remains intact.
Fonseka has promised to eliminate corruption, which a 2007 local report estimated is costing the $40 billion economy more than 350 billion rupees ($3.06 billion) a year. He has also pledged public sector salary increases of more than four times what Rajapaksa has, and other handouts. Without giving too many specifics, he has also said he would cut an effective corporate tax rate the World Bank says is in excess of 60 percent.
DO THE PLEDGES ADDRESS SRI LANKA’S REAL ECONOMIC ISSUE?
No. Sri Lanka’s main economic problem has been a high fiscal deficit averaging 8 percent of GDP since 1991. Successive governments have borrowed heavily due to the 25-year war and the cost of maintaining a bloated public sector. Analysts say the economic policies of both candidates mean more pressure on the deficit. In the past, that has meant high inflation and interest rates, weak rupee LKR= exchange rates and sluggish private sector growth.
WHAT DO ECONOMISTS THINK?
Economists say the policies of both candidates lack specific macroeconomic policy measures and cannot be implemented without improving revenue collection, cutting the public sector and spurring productivity. As stated now, the policies of both candidates would increase the fiscal deficit. Given that one of Fonseka’s main backers is the pro-business main opposition United National Party (UNP), he is viewed as potentially more business-friendly. But his other key supporter is the Marxist Janatha Vimukthi Peremuna (JVP), which has extracted a promise of government intervention in the economy after the global financial crisis. The UNP has agreed.
Some economists say Rajapaksa’s proven policies would be better than Fonseka’s yet-to-be-seen plans. Rajapaksa in his first four years has been able to maintain positive economic growth, though much of it came from high government expenditure on the war, the public sector and loan repayments.
WILL THE POLICIES HAVE AN IMPACT ON THE IMF LOAN?
Yes. Rajapaksa’s government has agreed to reduce its budget deficit to 6 percent of GDP by end-2010 and 5 percent by next year under a $2.6 billion International Monetary Fund (IMF) loan. If the victor implements his policies without a revenue increase and cost-cutting, achieving the deficit targets would be impossible. If the targets cannot be met even after a flexible IMF revision, analysts say that would mean a suspension of the programme and a number of adverse impacts, including withdrawal of foreign investments in government securities and a likely sovereign credit rating downgrade. (Editing by Bryson Hull and Bill Tarrant)