The real challenges are to be faced in 2016

2015 was a brilliant year for the United National Party (UNP) and President Maithripala Sirisena. On 8 January 2015 UNP, Maithripala Sirisena and a number of political parties and Civil Society Groups beat Mahinda Rajapaksa, a feat many thought was impossible. The interim government which was formed managed to escape relatively unscathed during the UNHRC sessions a few months after, beat Rajapaksa again during a general election and managed to pass the 2016 Budget with a two-thirds majority.

However, the real challenges are to be faced in 2016. There is a need to implement the promises made at the UNHRC, to fast track the reconciliation process and to deliver on the promises made at the economic front.

While implementing the promises made at the UNHRC and fast-tracking the reconciliation process might not be that hard with a bit of political will, with the majority of the population indicating that it is willing to move forward and with the Opposition forces in disarray, keeping the promises the government made on the economic front may be more difficult.

There is a common belief that the UNP is much better at managing the economy than the Sri Lanka Freedom Party (SLFP). This is a belief that survived the decade of Rajapaksa rule, which at a point in time seemed would last for another decade. Just like when the people believed that the American economy will bounce back immediately after the election of Obama, a significant number of people believed that the Sri Lankan economy will bounce back soon after Sirisena was elected.

However, undoing five years of economic mismanagement within a short period of time, while being a minority government, is not an easy task. Moreover, the Rajapaksa loyalists kept on attempting to derail the attempts made by the interim government. However, with a majority government and with a budget which was passed with a two-thirds majority, the UNFGG government now can make economic reforms that need to be done.
However, the problem lies with the direction the budget has taken.

The 2016 Budget was geared to attract foreign investment. Apart from a number of pro-business liberalizations, which include the facilitation of foreign transfer of funds and procurement of local assets by foreigners, the 2016 Budget makes little effort to stimulate agriculture or manufacturing. With the US Federal Reserve increasing interest rates and with at least three such hikes in 2016, there is a possibility that investors who might have invested in countries like Sri Lanka would go back to the US, because banks, money-market funds and other savings are likely to start offering higher returns on safe investments.

What is surprising is that the government took this decision knowing that things are not going too well with investments towards emerging markets. Economic activity has slowed in many emerging markets, with commodities-linked countries particularly hit hard as China begins to slow. According to the Institute of International Finance (IIF), net capital flows for global emerging markets was negative in 2015, the first time that it has happened since 1988. Net outflows for the year are projected at $541 billion, driven by a sustained slowdown in emerging market growth and uncertainty about China, IIF added.

In recent months we saw that currencies like the Sri Lankan rupee, Indonesian rupiah and the Malaysian ringgit fell sharply and the Fed interest rate hike and strengthened dollar are likely to further weaken these currencies.

This is not to say that things are destined to become worse, the Fed might not signal a more aggressive rate path, the uncertainty regarding China will die down soon and Russian and Iranian economies might ameliorate [with sanctions on oil ending (for Iran) and due to the significant Russian and Indian deals made less than 72 hours ago]. However it would be better for Sri Lanka to keep the words of Ayhan Kose, Head of the World Bank’s economic forecasting unit in mind, “You could have a perfect storm in some of these emerging markets if there’s a sudden stop in capital flows. They should hope for the best, but prepare for the worst.”