Business confidence turned around ahead of an election fraught with uncertainty

With a new presidential term taking effect for the next five years, Sri Lanka stands at a pivotal moment, eagerly anticipating the developments and decisions that will shape its future.

The business community in particular will be closely watching the unfolding events as the new administration’s policies and strategies will likely have telling implications for the national economy, not to mention the political landscape ahead of the next round of elections to elect the country’s parliamentarians.

THE INDEX Following two consecutive monthly declines, the LMD-PEPPERCUBE Business Confidence Index (BCI) rebounded to reach the psychologically important century mark in September.

This in fact is only the second time since June 2023 (when interest rates came down for the first time in three years) that the index registered three digits – the last being three months ago when the official rate of inflation began showing signs of falling to more manageable levels.

Despite this uptick however, the index remains well below its historical median of 122 although it is now 12 points higher than the average since September last year (88).

PepperCube Consultants notes that much like what was delineated from the results of the August BCI poll, businesspeople are adopting a wait and see approach towards Sri Lanka’s economic prospects, which was cited by survey respondents as the most pressing national issue during the countdown to the recent election.

SENSITIVITIES Number one on the list of sensitivities is undoubtedly how the new presidential term and prospect of general elections will impact the macroeconomic outlook.

At the same time, all eyes will be on whether or not the IMF programme (and therefore, the promise of debt sustainability) will be at risk, following the spate of election promises that have been made in the last month or so.

Among the key macroeconomic yardsticks that will come under intense scrutiny are whether inflation can be contained at the targeted five percent, the value of the Sri Lankan Rupee will remain at or around its current level, interest rates will taper more than they have in recent times, and revenues from tourism and expatriate workers are likely to continue to prop up the nation’s forex reserves.

And in this edition’s Economic Outlook column, economist Shiran Fernando notes that public sector salary hikes and changes to the tax regime will add to the burdens that election pledges will place on managing the state’s expenditure.

PROJECTIONS As it turns out, our contention last month that “the BCI will likely come under pressure in the near term” proved to be wrong – although as we also asserted, “the outcome of the election will have a telling impact on Sri Lanka’s economic trajectory…”

Accordingly, we – much like the businesspeople who respond to the unique monthly survey – will have to wait and see how the election outcome is viewed by representatives of the corporate community when next month’s edition of LMD reports on which direction the BCI pendulum swings.

What we can say with some degree of conviction is that this is anyone’s guess!

– LMD