Populist promises ahead of the election

Late Lee Kuan Yew – the founding father of the modern, prosperous Singaporean State – once described Sri Lanka’s democracy as an auction of non-existent resources at regular intervals. Some economists have cited democracy as a reason for the unwillingness of politicians in countries like Sri Lanka and Pakistan to implement politically unpopular yet essential reforms to overcome stagnation in their economies. On the other hand, the absence of elections in nations like China and Vietnam have enabled their rulers to march ahead without any obstacles.

True to Lee Kuan Yew’s assessment of the South Asian Island, presidential candidates have now begun the familiar practice of giving promises to woo voters. The country has a cherished history in terms of political promises during election times and seniors still recall the pledge of Sirimavo Bandaranaike at the 1970 General Election to bring rice even from the moon to fulfil her vow to provide two measures of rice per household. Ironically, instead of rice from the moon, the Government under her had banned serving rice in eateries on Tuesdays and Fridays.

Meanwhile, the NPP Leader Anura Kumara Dissanayake (AKD)’s promise to remove VAT on medicines, school items and food through his administration’s first budget has attracted a lot of attention. He had also pledged to reduce the electricity tariff by one third in addition to bringing down fuel prices. The Government too has outlined plans to grant a hefty salary increase to the public sector employees next year.

The NPP leader’s promise to reduce fuel prices brings back the memories of the 2004 General Election in which the SLFP-JVP combined UPFA alliance emerged victorious on the platform of removing the monthly fuel price revision mechanism which was implemented by the preceding Ranil Wickremesinghe administration from 2002 to 2004. As per the IMF standby arrangement, the Government is mandated to maintain cost-reflective price mechanisms for utilities like electricity and fuel. Hence, fluctuations in the price of crude oil in the world market would fundamentally determine fuel prices in the local market. The abrogation of the prevailing monthly fuel price adjustment method would result in breach of the agreement entered into with the Washington-based lender apart from adversely impacting the macroeconomic variables such as exchange rate and budget deficit in the event prices are kept lower than actual costs. 

AKD’s pledge to remove VAT on categories like medicine, education, and food is a little bit ambiguous as most of the items coming under such classes of goods have already been exempted from VAT. About five months ago, the presidential aspirant at the NPP Banking and Finance Sector Stakeholder Forum severely castigated the PAYE tax and remarked that the NPP staunchly opposes the PAYE tax, as it diminishes people’s purchasing power while hindering economic activities. The re-imposition of PAYE by Wickremesinghe in his capacity as Finance Minister has angered white-collar workers in the private sector, particularly bankers who earn high salaries. According to the Treasury, the PAYE generated Rs. 145 billion revenue in 2023.

The respected economist Dr. Sharmini Coorey in an op-ed to the Daily Mirror on 29 February, 2024, under the title – “Economic Policies in an Election Year: Some Inconvenient Arithmetic” – clearly pointed out that Sri Lanka’s tight fiscal situation and vulnerability to another bout of debt distress will remain whatever political ideology one espouses and whether or not we have an IMF-supported program. She also opined that policy reversals like lowering taxes or delays in implementing structural reforms would only make matters worse.

Throughout history, our nation has suffered from mindless economic populism. Given the extremely fragile nature of the economic recovery, this is not the time to indulge in vote-grabbing populist politics which could seriously undermine the macroeconomic stability of the State.