he road ahead for Sri Lanka will be tough. Having defaulted on its external debt, to the tune of $56 billion, in mid-April, it has waded from one crisis to another. The country’s new President, Ranil Wickremesinghe, has vowed to resolve the issues ailing the economy. To this end, his government has emphasized closer engagement with the International Monetary Fund (IMF) as well as its bilateral creditors.
Wickremesinghe has had very little choice in the matter. His appointment as leader of the country followed from a series of months-long, island-wide protests that toppled his predecessor, Gotabaya Rajapaksa, from power. These protests have lulled for now, but they may well emerge again, should he fail to deliver.
Maintaining stability while overseeing IMF negotiations has been and will continue to be Sri Lanka’s biggest challenge. The country is still headed by the Sri Lanka Podujana Peramuna (SLPP)—a political party associated with the Rajapaksas, the familial dynasty that has dominated the country’s politics for over 15 years. The SLPP is seen as corrupt, inefficient, and ineffective, and has been unable to appease protesters.
To save face, then President Rajapaksa appointed Ranil Wickremesinghe as Prime Minister, after a series of incidents forced the resignation of his brother from the post on May 9. After Gotabaya Rajapaksa’s departure on July 13, Wickremesinghe moved to tighten his grip. He secured the support of the SLPP in his bid for president, winning a majority of 52 votes in parliament. However, as he was not elected to office by people, many view him as lacking legitimacy.
While under Gotabaya Rajapaksa, the Sri Lankan government responded to the swelling tide of protests by means of ineffectual strategies like social media bans and curfews. Since winning his election on July 20, Ranil Wickremesinghe has resorted to more direct and violent means. Two days after his appointment, he directed the military to forcibly eject protesters occupying the Presidential Secretariat in Galle Face, Colombo—the site of anti-government demonstrations since April.
At the same time, Wickremesinghe has shifted gears, attempting to resolve some of the more acute problems, such as fuel shortages. For instance, in July, the country’s Power and Energy Ministry opted for a digital solution to the fuel crisis: a QR code based Fuel Pass. The system has worked so far, reducing the country’s monthly fuel bill by half. With these maneuvers, Wickremesinghe managed to pacify protesters, and by August 13, they voluntarily vacated their site at Galle Face.
The government’s strategy has been two-pronged. While ordering arrests of activists and protesters, it has also been co-opting sections of the opposition, even those which refused to accept Ministries. It has also appointed critics of the regime as officials and heads of committees. Through such gestures, Wickremesinghe has both promoted the need for an all-party government and sleekly legitimized his presidency.
Despite these developments, however, the government will find it difficult to implement IMF reforms. It has increased electricity tariffs by an average of 75%. More hikes may follow. State-owned enterprises will be restructured over the next few months. The Energy Minister has admitted that the public sector is overstaffed, pointing to the need for a complete overhaul of the bureaucracy. This will likely be opposed by trade unions, to say nothing of middle-classes assailed by mounting inflation.
Whether these strategies will work in the long run remains to be seen. Considered as pragmatic by his supporters and authoritarian by his critics, Wickremesinghe has, thus far, avoided the fallout which befell his predecessor. He depends for his survival on the support of the ruling party, the SLPP—which depends on him for its survival. This is a marriage of convenience, but it has not deteriorated even though a faction of the SLPP distanced itself from the alliance and now sits in the opposition.
Undergirding these issues have been Sri Lanka’s complex foreign relations. China’s reluctance to restructure the island’s debt has proved to be a barrier to IMF negotiations. As one of Sri Lanka’s largest creditors, Beijing stands to lose a lot in the process. Debt restructuring could set off negotiations elsewhere in the region. This could result in a cascade that would harm Beijing’s interests—particularly as tensions grow with Taiwan.
There has been progress towards reaching such an agreement. On September 1, the IMF announced that it had finalized a staff-level agreement with the government, something the Governor of the Central Bank, Dr. Nandalal Weerasinghe, announced two weeks before. While the staff-level agreement, which involves an Extended Fund Facility (EFF) disbursement of $2.9 billion, is subject to final approval from the IMF Executive Board and depends on negotiations with creditors, it marks, as an opposition lawmaker noted, “the successful completion of the first concrete step in the process.”
An array of domestic and external factors will thus complicate Sri Lanka’s negotiations with the IMF. Domestically, the country is headed by a government seen as lacking legitimacy, with a President who moved against protesters and co-opted elements of the opposition. It is also coming face to face with a number of geopolitical challenges, such as China’s ambivalence regarding debt restructuring. Balancing these domestic and foreign constraints will be necessary for the Sri Lankan government to address the ongoing economic crisis, and reach a final agreement with the IMF.
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Sri Lanka’s Rocky Road to Recovery
Sri Lanka. Photo by Eddy Billard via Unsplash.
September 14, 2022
Sri Lanka has waded from one crisis to another. Maintaining stability while overseeing IMF negotiations has been and will continue to be Sri Lanka’s biggest challenge, and there’s no denying that the road ahead for Sri Lanka will be tough, writes Factum’s Uditha Devapriya.
T
he road ahead for Sri Lanka will be tough. Having defaulted on its external debt, to the tune of $56 billion, in mid-April, it has waded from one crisis to another. The country’s new President, Ranil Wickremesinghe, has vowed to resolve the issues ailing the economy. To this end, his government has emphasized closer engagement with the International Monetary Fund (IMF) as well as its bilateral creditors.
Wickremesinghe has had very little choice in the matter. His appointment as leader of the country followed from a series of months-long, island-wide protests that toppled his predecessor, Gotabaya Rajapaksa, from power. These protests have lulled for now, but they may well emerge again, should he fail to deliver.
Maintaining stability while overseeing IMF negotiations has been and will continue to be Sri Lanka’s biggest challenge. The country is still headed by the Sri Lanka Podujana Peramuna (SLPP)—a political party associated with the Rajapaksas, the familial dynasty that has dominated the country’s politics for over 15 years. The SLPP is seen as corrupt, inefficient, and ineffective, and has been unable to appease protesters.
To save face, then President Rajapaksa appointed Ranil Wickremesinghe as Prime Minister, after a series of incidents forced the resignation of his brother from the post on May 9. After Gotabaya Rajapaksa’s departure on July 13, Wickremesinghe moved to tighten his grip. He secured the support of the SLPP in his bid for president, winning a majority of 52 votes in parliament. However, as he was not elected to office by people, many view him as lacking legitimacy.
While under Gotabaya Rajapaksa, the Sri Lankan government responded to the swelling tide of protests by means of ineffectual strategies like social media bans and curfews. Since winning his election on July 20, Ranil Wickremesinghe has resorted to more direct and violent means. Two days after his appointment, he directed the military to forcibly eject protesters occupying the Presidential Secretariat in Galle Face, Colombo—the site of anti-government demonstrations since April.
At the same time, Wickremesinghe has shifted gears, attempting to resolve some of the more acute problems, such as fuel shortages. For instance, in July, the country’s Power and Energy Ministry opted for a digital solution to the fuel crisis: a QR code based Fuel Pass. The system has worked so far, reducing the country’s monthly fuel bill by half. With these maneuvers, Wickremesinghe managed to pacify protesters, and by August 13, they voluntarily vacated their site at Galle Face.
The government’s strategy has been two-pronged. While ordering arrests of activists and protesters, it has also been co-opting sections of the opposition, even those which refused to accept Ministries. It has also appointed critics of the regime as officials and heads of committees. Through such gestures, Wickremesinghe has both promoted the need for an all-party government and sleekly legitimized his presidency.
Despite these developments, however, the government will find it difficult to implement IMF reforms. It has increased electricity tariffs by an average of 75%. More hikes may follow. State-owned enterprises will be restructured over the next few months. The Energy Minister has admitted that the public sector is overstaffed, pointing to the need for a complete overhaul of the bureaucracy. This will likely be opposed by trade unions, to say nothing of middle-classes assailed by mounting inflation.
Whether these strategies will work in the long run remains to be seen. Considered as pragmatic by his supporters and authoritarian by his critics, Wickremesinghe has, thus far, avoided the fallout which befell his predecessor. He depends for his survival on the support of the ruling party, the SLPP—which depends on him for its survival. This is a marriage of convenience, but it has not deteriorated even though a faction of the SLPP distanced itself from the alliance and now sits in the opposition.
Undergirding these issues have been Sri Lanka’s complex foreign relations. China’s reluctance to restructure the island’s debt has proved to be a barrier to IMF negotiations. As one of Sri Lanka’s largest creditors, Beijing stands to lose a lot in the process. Debt restructuring could set off negotiations elsewhere in the region. This could result in a cascade that would harm Beijing’s interests—particularly as tensions grow with Taiwan.
There has been progress towards reaching such an agreement. On September 1, the IMF announced that it had finalized a staff-level agreement with the government, something the Governor of the Central Bank, Dr. Nandalal Weerasinghe, announced two weeks before. While the staff-level agreement, which involves an Extended Fund Facility (EFF) disbursement of $2.9 billion, is subject to final approval from the IMF Executive Board and depends on negotiations with creditors, it marks, as an opposition lawmaker noted, “the successful completion of the first concrete step in the process.”
An array of domestic and external factors will thus complicate Sri Lanka’s negotiations with the IMF. Domestically, the country is headed by a government seen as lacking legitimacy, with a President who moved against protesters and co-opted elements of the opposition. It is also coming face to face with a number of geopolitical challenges, such as China’s ambivalence regarding debt restructuring. Balancing these domestic and foreign constraints will be necessary for the Sri Lankan government to address the ongoing economic crisis, and reach a final agreement with the IMF.
