sri lanka
Image Credit: Bloomberg

Sri Lanka’s economic crises continues. The riots that started in April compelled Mahinda Rajapaksa to resign as prime minister.

President Gotabaya Rajapaksa has made the experienced politician — five-time prime minister (PM) — Ranil Wickremsinghe the island nation’s new PM. Being the sole member of his United National Party (UNP), after facing serious difficulties in forming a government, he has stitched a 21-member cabinet mainly from the President’s party — Sri Lanka Podujana Peramuna (SLPP). With the country is throes of worsening economic and political crises, it remains to be seen how far a new government can succeed.

On the day Wickremsinghe assumed office, he issued a candid assessment of the dire economic situation. The country is short of revenue and has no money for its expenses. In November 2019, he said Sri Lanka had $7.5 billion in reserves, which have just come down to $1 million. He is presenting an interim budget within a few weeks and has warned of hardships bigger than what people are experiencing. He has nonetheless, raised hopes of relief after that due to better economic management and international support.

Many believe that Wickremsinghe may be well placed to steer the country out of the crises. Through his five previous terms as prime minister he has the required contacts with governments like Japan, China, India, IMF and other donors to steer Sri Lanka out of this morass. Keeping the finance ministry for himself, Wickremsinghe is expected to lead negotiations with the IMF himself.

Others are not too hopeful. As a one-man party in the parliament, he does not enjoy broad based support across party lines or among the public. His appointment may do little to ease political instability. He and the President lost the first parliamentary test recently when the lady candidate they supported for deputy speaker of the parliament lost to another (Ajith) Rajapaksa who belonged to SLPP.

For now, he seems to have calmed public anger at the Rajapaksa family, who are widely blamed for bringing Sri Lanka to the current state of affairs. But more trouble will erupt once the interim budget is announced.

“People have been calling for a system change, loudly and clearly. Wickremesinghe’s appointment does not address that demand so there is anger among people,” says Bhavani Fonseka, senior researcher at the Center for Policy Alternatives in Colombo.

“He is seen as close to the Rajapaksas’ and has no credibility. So, the political stalemate in the country continues,” former Lanka president Chandrika Kumaratunga said in an interview.

The challenges he faces are immense. If there is no political stability, Sri Lanka cannot begin to tackle economic emergency. The new PM’s appointment has not appeased protesters, who have vowed to press on with their campaign for the ouster of President Rajapaksa.

The seeds of the economic troubles were actually sown during the presidency of Mahinda Rajapaksa 2005 to 2015. Buoyed by victory over the long running Tamil insurgency, he borrowed heavily to spend on big infrastructure projects some of which were of little economic value. The economic slide was not corrected during the term of his successor Maithripala Sirisena.

And Gotabaya Rajapaksa made two disastrous decisions on coming to power in 2019. First, he followed through on his elections promise to bring in huge tax cuts, which meant that the government suddenly lost a quarter of its revenue. Publicly incentivising the business and people, in reality it was a ploy to win parliamentary election, which Rajapaksas won handsomely.

In another surprise move, the president overnight banned the import of all chemical fertilisers forcing the Sri Lankan farmers to go completely organic. Farm output plummeted. Sri Lanka was left to import rice for the first time. Food prices went up suddenly shocking people who were accustomed to getting their staples cheaply.

Amid economic mismanagement the pandemic hit the economy massively. Tourists disappeared, affecting the foreign exchange earnings. The tourism industry’s contribution to GDP fell from 5.6 per cent in 2018 to 0.8 per cent in 2020. But the government still spent heavily, resulting in a currency depreciation.

By early 2022, the economy was in free fall. The government then delayed going to the IMF until March this year, hoping that returning tourists and help from China would tide it over. But just as tourism began to recover, conflict in Ukraine pushed up commodity prices yet again, making imported fuel and food dearer.

It is almost impossible for the government to pay back $7 billion of principal and interests that are due this year.

Sri Lanka desperately needs cash. India has offered more money to help fuel imports. China has also put more loans on the table. But the main hope is to secure a bailout from the IMF. The economic and political crises are so intertwined that Sri Lanka needs first to show to the IMF and other major partners that it has a stable government which will be able to honour its commitments.

These are testing times for Sri Lanka and a lesson for others.

Sajjad Ashraf served as an adjunct professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore from 2009 to 2017. He was a member of Pakistan Foreign Service from 1973 to 2008 and served as ambassador to several countries.