By Amila Muthukutti –

Amila Muthukutti

As economic management is in the hands of politicians, whatever happens in the political arena directly impacts on the economy. No matter how strong private sector is, no matter how efficient labor force is, no matter how useful natural resources is in the economy, when politicians whose job is to draft economic policies act foolishly, economy gets derailed, indicating a lot of repercussions where the business community cannot find any direction. 

With the political crisis that is getting prolonged over nearly two months, Sri Lankan economy is badly hit in an unprecedented manner. It is needless to state that political stability is a must for economic development. Even though political stability was problematic for past few years, it went from bad to worse, due to the current political crisis which has disabled the entire economy, aftermath of which will have to be experienced shortly. 

Stock market 

Changing economic situation is always reflected by the stock market. Foreign investors play a pivotal role in the Colombo Stock Exchange (CSE), as local investment is not enough for boosting the market. However, it could be observed that foreign investors started withdrawing their funds from the Colombo Stock Exchange, as the country has not showcased any economic progress. When politicians struggle for power wasting time that would have been used for development, investors are not willing to put their money at risk. Accordingly, foreigners are selling their stakes even at blue chips, paving the way for local investors to buy at discounted prices. Stock market indices are going up slowly, but, stock prices are stagnant. This is because of high volume of stocks being traded at lower prices. 

Over Rs. 30 billion foreign outflows from Sri Lanka’s bonds and stock market since crisis have been reported. This cannot be taken lightly, because the country is facing with rupee depreciation which accelerated its speed soon after the crisis. This also badly impacts on corporate earnings resulting in listed companies that pay lower dividend or zero dividend. 

Depreciation 

Whatever said or done, Sri Lanka is a country that highly imports. Hence, rupee depreciation has an adverse impact even on consumer at the grass-root level. Value of the rupee is decided by demand and supply in the foreign exchange market. With high level of cash outflow and slower inflow, the rupee can be further expected to be depreciating. The fact that the Central Bank pumps US dollars into the foreign exchange market is not a permanent solution. However, even though export sector must be encouraged to alleviate the possible repercussions of the depreciation, businesses are struggling to survive their operations amidst politically as well as economically unstable atmosphere. In my opinion, as currently politics is discussed more than economics in Sri Lankan context especially taking no action to curb the rupee depreciation; the economy will be pushed to the state where it cannot be rescued under any circumstance. 

Uncertainty 

It is not wrong to say that the entire public system is in a chaos, as functions of the premier and the cabinet are temporarily suspended by the court order. Dr. Harsha de Silva recently stated that Sri Lanka’s economy is currently on life support. He went on to say that the Executive President doesn’t have control over public finance, as it constitutionally lies with the Parliament. Consequently, there is a risk of being unable to finance over $ 1 billion in debt repayments due in the first two weeks of January. 

Furthermore, it is reported that by the end of November this year, Official Reserve Assets is $ 7018.38 million. It was $ 7903.31 million at the end of October. Accordingly, it has gone down by $ 884.93 million. Reducing reserves is alarming. To put it simply, if an individual spends his savings and thereby his savings are in the decrease, he cannot be identified financially stable person. The same is applied to Sri Lankan economy as well.

Whether or not people discuss it, the economy is heading towards a dark era. Many seem to be politically motivated and struggling for power and therefore blind on economic repercussions. However, everyone will have to experience economic downturns in the near future, as economy is the victim of all these political dramas.