The Crisis In Governance: Likely Economic Consequences & The End Game 

By SWR de A Samarasinghe –DECEMBER 2, 2018

Prof. S W R de A Samarasinghe 

The crisis of governance that Sri Lanka is currently facing is unprecedented in post-war Sri Lankan politics. Two individuals claiming to be prime minister and one major party boycotting parliament illustrate the point. There is no need to recount in detail the events of the past five weeks that are publicly known. The purpose of this article is to note some of the serious implications of this crisis for the economy of the country and to stress the importance of resolving the crisis in a manner that would reverse these adverse trends. 

Political Economy

Politics and Economics are closely inter-twined in the real world. Thus the term “political economy’ is used here to describe the conceptual framework that best suits to understand the ramifications of the crisis for the nation’s economic health and the economic welfare of its people. 

Growth

First, political uncertainty causes policy uncertainty. That in turn makes investors hold back investment and wait to see which way the pendulum would swing. In short political uncertainty is bad for jobs and economic growth. Sooner the crisis is resolved the better. 

Tourism

Second, there are credible reports of short-term adverse economic consequences attributable to the current crisis. Recall that in May of this year Tourism Minister John Amaratunga officially announced that the number of tourist arrivals in 2018 first projected to be 3.0 million had been cut back to 2.5 million on account of the Anti-Muslim riots in March and the outbreak of Dengue fever. That announcement notwithstanding, the respected travel guide Lonely Plant last October named Sri Lanka as the “best in travel for 2019”. With such a boost, it is unfortunate that tourism, that generate about 5% of Sri Lanka’s GDP worth about $88 billion, faces a serious setback owing to events completely beyond the control of the industry. 

Bureaucracy

Third, there are credible reports, albeit informal, that many government officials are reluctant to sign off on legitimate economic transactions – contracts, release of funds payable, release of imported material from ports, and a myriad of other routine things – that must happen for a complex economy to function smoothly. One example that the present writer is aware of involves literally dozens of small contractors who are involved in construction in almost every district of the country. The funds for the project concerned come from a major western donor and the flow of funds came to a virtual halt for about one month because of bureaucratic uncertainty arising from the crisis.   

US Assistance

Read More