Sri Lanka’s economy marked end-2017 with a slew of economic indicators signaling a return to stability. The consensus was that macroeconomic stability was to be maintained and the coalition government with its reform agenda, spearheaded by the Vision 2025 policy formulation, would ensure this.

But there are always two factors that have consistently affected Sri Lanka’s macroeconomic stability – i.e. global market volatility and domestic politics. The first quarter of 2018 once again proved that these two factors continue to hold influence.

February saw investors pondering the likely outcome of the local government election.

And the outcome of that election has put into serious question the very future of the coalition government, with both ruling parties suffering heavy electoral setbacks in the face of the former President Rajapakse’s new party.

Not only this, since then the country has also faced ethnic riots in Kandy, an unsuccessful yet heated No-Confidence motion against the Prime Minister and a yet another cabinet reshuffle after 16 Member of Parliaments quit their ministerial portfolios.

Wasted Political Capital

These political challenges are emerging in the context of the national elections which are set to take place in another two years – the Presidential elections in December 2019 and the General Elections by May 2020. The coalition government no longer has the luxury of the political capital that it had back in 2015, which it failed to invest properly by pushing through early reforms.

Yes, the government has still carried out a number of vital legislative reforms, especially within the past year. These include the New Inland Revenue Act, New Forex Management Act, New Trade Policy, Active Liability Management Act and the Right to Information Act alongside the 19th Amendment to the Constitution.

In addition to these, it has also signed new Free Trade Agreements (FTAs) with Singapore and Pakistan, and is in advanced negotiations on FTAs with China and India, while opening the door to FTAs with Indonesia, Malaysia and Bangladesh. These carry the potential to make Sri Lanka a trade and investment hub in the Indian Ocean region.

While the specter of political uncertainty and high debt repayments over the next two years threaten to slow down the pace of progress, the momentum on these steps in trade and investments have to be maintained.

Getting things done

By the time politics eventually settles down after the 2020 elections, the global economic environment might have changed dramatically, especially given that quantitative easing is coming to an end. That would raise a question on how global liquidity and risk appetite will affect investments flowing into frontier markets like Sri Lanka.

Yet, whilst looking at Sri Lanka’s history it is reasonable to take into these words of Indrajit Coomaraswamy, the Governor of the Central Bank of Sri Lanka – “Sri Lankan politics are always untidy, but we do get things done.”

The recent offering of $2.5 billion in Eurobonds at rather favourable yields reflects that despite the untidiness of the country’s politics, the ability of the country’s leadership (like the Governor) to get things done should help Sri Lanka navigate an uneasy couple of years. Markets and investors appear to be taking this view as well.

Frontier Research’s view

A major focus of Frontier Research’s work in macroeconomics, apart from offering a well-rounded view of the Sri Lankan economy beyond just models and their mathematics, is on forecasting the path of the interest rate and exchange rate. The firm’s current outlook looks at the possible path of the rates till end-2019, which provides its clientele of major financial institutions and conglomerates a base to work with for their long-term strategies. The firm’s Banking and Finance sector research and news curation products like the daily Time Twister newsletter also provides a one stop access to the critical economic, financial and political news from Sri Lanka.

Interested readers should contact the writer to understand these forecasts and research further.

By: Thilina Panduwawala, Senior Product Lead at Frontier Research

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