Political rupture in Sri Lanka: What lies ahead?

If Sri Lankans rally behind Dissanayake and the NPP at the forthcoming general elections, then the IMF may need to listen – Pic by Shehan Gunasekara

21 September was a day of many firsts in Sri Lanka. Millions of people went to the polls to vote in the first Presidential elections since mass protests forced the country’s last elected president, Gotabaya Rajapaksa, from office in 2022. 1, 2 

It also marked the first time in Sri Lanka’s history that a second round of counting had to take place after none of the candidates secured the 50% margin required for victory. 

A count of the second-choice votes revealed the biggest shock in decades. In Anura Kumara Dissanayake, Sri Lankans for the first time elected a candidate who does not belong to the two major parties that have dominated the country’s politics since independence in 1948.3

Dissanayake leads the National People’s Power alliance (NPP), which includes his Janatha Vimukthi Peramuna (JVP) – a party known for its leftwing policies. 

Soon after being sworn in as President, Dissanayake appointed an interim cabinet of three ministers. This included academic, feminist and human rights activist Harini Amarasuriya, who was selected as the third female prime minister in Sri Lanka’s history.4

He then dissolved the 225-member parliament in which his NPP alliance had only three seats and announced that a parliamentary election would be held on 14 November. Dissanayake has said previously that there was “no point continuing with a parliament that is not in line with what the people want”.5

Dissanayake has a daunting task ahead of him. Sri Lanka defaulted on its debt and suspended payments on around $ 78 billion (£ 59 billion) in foreign and domestic loans in 2022, which triggered the worst economic crisis in the country’s history.6

Economy still in precarious state 

And, while no longer on the brink of collapse, the economy is still in a precarious state. So how will Dissanayake revive Sri Lanka’s struggling economy and, perhaps more importantly, will he be able to?  

A key challenge facing Dissanayake is managing the terms of a $ 2.9 billion bailout loan from the International Monetary Fund (IMF), which was based on an analysis that presented an overly optimistic outlook for economic growth.7

This loan was negotiated amid considerable controversy by the country’s unelected acting president, Ranil Wickremesinghe, and his administration in 2023, and came with highly unfavourable terms for the country.8 

These included stringent austerity measures, higher prices for essential goods and services, and domestic debt restructuring. This latter measure means that the retirement funds of working people are going to lose half of their value over the next 16 years.9,10

The debt relief was also contingent on Sri Lanka meeting a set of fiscal targets. These include reducing its public debt to 95% of GDP by 2032, and spending 4.5% of GDP annually on servicing its external debt once the IMF program is finished. This amounts to 30% of all Government revenue going on servicing debt – a significant drain on the country’s meagre resources.11, 12

The IMF agreement has prioritised the interests of Sri Lanka’s creditors, who hold 37% of the country’s outstanding foreign debt, and has instead shifted the burden onto working-class Sri Lankans.13

The hardship caused by the cost-cutting and austerity has caused public opposition to grow. In March, for example, thousands of workers at hospitals, schools and railways across Sri Lanka went on strike to protest against the Government’s austerity drive.14

What next?

One of Wickremesinghe’s final acts in office was to announce that a draft deal had been reached with international bondholders – who are owed $ 12.5 billion – to restructure some of the country’s external debt. The deal involves issuing new bonds that would track the country’s economic recovery.  

Some experts fear that these bonds, which would have bigger payouts tied to GDP and are no more than a sweetener for the country’s creditors, may cause Sri Lanka to fall back into debt trouble by the end of the decade.15 

Dissanayake must first refrain from hastily agreeing to this agreement with bondholders. But how can he ensure growth without relying on new debt? And, importantly, how can this growth be more equitably distributed? 

During the Presidential campaign, the NPP acknowledged the crucial role the IMF would play in restructuring Sri Lanka’s external debt. And Dissanayake will need to work closely with the IMF to renegotiate the parameters of the financial assistance it provides. However, delays in receiving the next proportion of funds are possible if negotiations extend.16

Taking new criteria into consideration is key. This new framework should include enhanced social safety nets and allowances for more spending on public provisions. In the longer term, solutions will need to include forgiveness of some of the debt that is owed, as well as fiscal targets that are achievable and also reduce the risk of further defaults.

The Sri Lankan public is clamouring for a shift from the status quo. If Sri Lankans rally behind Dissanayake and the NPP at the forthcoming general elections, then the IMF may need to listen. The winds of change could finally have arrived.

References:

1Kelegama, Thiruni (2024) “Sri Lanka: Why the Country’s wait for elections must end” The Conversation February 16th 2024 https://theconversation.com/sri-lanka-why-the-countrys-wait-for-elections-must-end-223049

2Peterson-Ellis, Hannah (2022) “Sri Lanka President quits after protests in crisis-hit country” The Guardian July 14th 2022 https://www.theguardian.com/world/2022/jul/14/sri-lanka-president-gotabaya-rajapaksa-quits-protests

3Ariyasinghe, Marlon (2024) “The Man who would oust a dynasty” Journal of Democracy September 2024 https://www.journalofdemocracy.org/elections/the-man-who-would-oust-a-dynasty/

4Reuters (2024) “Sri Lanka president dissolves parliament to clear way for Nov. 14 polls” Reuters September 25th 2024 https://www.reuters.com/world/asia-pacific/sri-lanka-president-dissolves-parliament-make-way-nov-14-polls-2024-09-24/

5Ng, Kelly and Andre-Rauden Paul (2024) “Sri Lanka’s new president dissolves parliament” BBC September 24th 2024 https://www.bbc.com/news/articles/c05gnm05qmdo

6Hoskins, Peter (2022) “Sri Lanka defaults on debt for first time in history” BBC May 20th 2022 https://www.bbc.com/news/business-61505842

7Setser, Brad (2024) “Sri Lanka’s Bond Deal should not set a precedent” Council of Foreign Relations Blog July 16th 2024 https://www.cfr.org/blog/sri-lankas-bond-deal-should-not-set-precedent

8Jayasinghe, Uditha (2023) “Wickramasinghe delivers IMF deal for Sri Lanka despite public mistrust” Reuters March 21st 2023 https://www.reuters.com/world/asia-pacific/wickremesinghe-delivers-imf-deal-sri-lanka-despite-public-mistrust-2023-03-21/

9Ghosh, Jayati and Kanchana N Ruwanpura (2023) “Sri Lanka’s Dangerous Domestic Debt Restructuring” Project Syndicate September 13th 2023 https://www.project-syndicate.org/commentary/sri-lanka-government-imf-austerity-deal-will-exacerbate-debt-crisis-by-jayati-ghosh-and-kanchana-n-ruwanpura-2023-09

10Kadirgamar, Ahilan (2024) “Austerity, dispossession and injustice: Facets of the debt crisis in Sri Lanka” Daily FTApril 25th 2024 https://www.ft.lk/columns/Austerity-dispossession-and-injustice-Facets-of-the-debt-crisis-in-Sri-Lanka/4-761004

11Kadirgamar, Ahilan (2024) “Sri Lanka’s new president faces a problem shared by too many developing countries: Austerity imposed by the West” The Guardian September 28th 2024 https://www.theguardian.com/commentisfree/2024/sep/28/sri-lanka-president-developing-austerity-west-dissanayake-imf?CMP=Share_iOSApp_Other

12Jones, Tim (2024) “Sri Lanka would still be in the top 15 countries for debt payments” Tweet on X March 27th 2023 https://x.com/tim_jones6/status/1640383253004648448?s=09

13Moramudali, Umesh (2019) “Is Sri Lanka really a Victim of China’s Debt Trap” The Diplomat May 14th 2019 https://thediplomat.com/2019/05/is-sri-lanka-really-a-victim-of-chinas-debt-trap/

14Al-Jazeera (2023) “Sri Lanka unions stage strike to protest against an IMF bailout plan” Al-Jazeera News March 15th 2023 https://www.aljazeera.com/news/2023/3/15/sri-lanka-unions-stage-strike-to-protest-against-imf-bailout-plan

15Setser, Brad (2024) “Sri Lanka’s Bond Deal should not set a precedent” Council of Foreign Relations Blog July 16th 2024 https://www.cfr.org/blog/sri-lankas-bond-deal-should-not-set-precedent

16Setser, Brad (2024) “IMF, Sri Lanka’s Debt and Debt Sustainability Analysis” Yukthi TV September 2024 https://www.youtube.com/watch?v=JaO3bNjGUgM

(Thiruni Kelegama is a Lecturer in Modern Asian Studies, Oxford School of Global and Area Studies, University of Oxford, England and Research Collaborator, Institute of Political Economy, Sri Lanka. Kanchana N. Ruwanpura is a Professor of Development Geography, University of Gothenburg, Sweden, Fellow Centre for South Asian Studies, University of Edinburgh, Scotland and co-founder of the Institute of Political Economy, Sri Lanka.)

(Initially published in The Conversation)