ISSN 2330-717X

Sri Lanka’s Steps Towards Ending The Dog Days – Analysis

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With moves towards political stability and assurances of widespread external support, there’s hope that Sri Lanka will tide over the crisis.

After months of economic distress, peaceful expressions of public anger punctuated by mindless violence, political conflicts and institutional instability, Sri Lanka now appears to be on the way to restoring normalcy.

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There is no denying that serpentine queues for fuel and cooking gas are still there, and prices of essentials are sky high. Some essentials like milk powder have either disappeared from the market or are too highly priced. But power supply has noticeably improved, ending, in a manner of speaking, an “era of darkness”.

The government’s writ, which had ceased to run in several parts of the country, including the critical space outside the President’s office in Colombo, has been restored. The threat of disciplinary action prevented a strike by the Ceylon Electricity Board engineers, which would have cut off power supply to the entire island. The engineers demanded cancellation of two foreign private sector-funded power projects including one by the Adanis of India.    

While India continues to supply essentials like food, fuel, fertilizer and medicines to the best of its ability, China has at long last come out of its shell and indicated that it is ready to pitch in to help struggling Sri Lanka. A spat with Russia (a potential supplier of fuel) over the legality of an Aeroflot flight, ended with diplomatic engagement, though belatedly. Apparently, it takes time for the Lankan bureaucracy to absorb Prime Minister Ranil Wickremesinghe’s advice that it should treat the country’s traditional friends with respect and consideration.

Political Stability

The painfully elusive political stability now appears to be within reach. It has finally dawned on key political players, both in the ruling side and in the opposition, that without political stability, international financial aid will not be forthcoming.

While President Gotabaya Rajapaksa remained unwavering in his stand that he would quit only if thrown out by constitutional means and not by pressure emanating from street agitators, the Aragalaya or Struggle to force him to quit petered out. This enabled him to begin functioning normally. But the “Go Gota Go” campaigners could derive satisfaction from the fact that they ousted the other Rajapaksas, including Prime Minister Mahinda Rajapaksa.  

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Appointment of Wickremesinghe

The problems created by instability in parliament and confusion in foreign relations, were partially addressed by the appointment of Ranil  Wickremseinghe as Prime Minister in place of Mahinda Rajapaksa.  Though Wickremesinghe’s appointment was bitterly criticized because he is the lone member of his party in parliament, Wickremesinghe did bring to the table his good relations with the international community and the donors. 

The conflict in parliament over the contents of the 21 st.Amendment (21A) to curtail the powers of the Executive President, appears to be ending with one of the major obstacles being removed. Basil Rajapaksa, a powerful member of the ruling Sri Lanka Podujana Peramuna (SLPP) and a dual citizen (US-Lankan), resigned on Thursday, respecting a clause in the draft 21A which said that dual citizens are not eligible to hold political office. With this issue out of the way, and with the MPs agreeing to let the President keep the Defense portfolio, the 21A is likely to be passed with the required two third majority and without a referendum.

Given the informal deal between President Gotabaya and Prime Minister Wickremesinghe to work harmoniously, Sri Lanka’s unhappy history of troubled diarchies will not be repeated, hopefully. This will help the international community repose confidence in the Lankan government and help expedite their aid programs.

The likely appointment of leading entrepreneur Dhammika Perera in place of Basil Rajapaksa as an MP of the ruling SLPP, will be welcomed by the corporate sector as well as the international community as he has published a detailed plan for enhancing Sri Lanka’s revenue, sector by sector.  He might even be accommodated in the cabinet in accordance with the President’s and the Prime Minister’s penchant for the involvement of subject experts in governance.

The Prime Minister spoke to the IMF Managing Director Kristalina Georgieva to expedite the staff-level agreement with Sri Lanka and extend the IMF’s facility by September. On its part, China said that it is “ready to work with relevant countries and international financial institutions to continue to play a positive role in supporting Sri Lanka’s response to current difficulties and efforts to ease debt burden and realize sustainable development.”

Long way to Go

Though these are encouraging developments, Sri Lanka has a long way to go before normalcy is restored. The Prime Minister told parliament that Sri Lanka has to find US$ 3,300 million for oil imports in the next six months. It would need US$ 250 million over the next six months to supply cooking gas. He warned that serpentine queues at fuel stations would continue for the next three weeks and called for rationing of fuel through a coupon system.

Sri Lanka’s annual rice requirement is 2.5 million mt. But it has only 1.6 mt in stock. To tide over serious shortages in the next few months, Sri Lanka has to import US$ 150 million worth of rice every month. It would cost US$ 600 million a year to import fertilizer. An alleviation in the harvest situation is expected only in February 2023.

A recent study by the World Food Program (WFP) found that 73% of participating households had reduced their diet and food intake. Sri Lanka needs US$5 billion in the next six months to ensure that daily lives are not disrupted. Another US$ 1 billion is needed to strengthen the rupee. In all, the country needs US$ 6 billion, at the minimum, for the next six months.

According to the Central Bank, the average GDP growth in 2022 will be -3.5% but according to the International Monetary Fund, the growth will be a negative 6.5%, partly due to the Ukraine conflict. Recovery is expected only in 2024.

Sri Lanka’s external loans amount to US$ 53 billion. Many loan installments received from multilateral institutions have to be repaid this month. In fact, Sri Lanka has already defaulted and is seeking fresh reschedules for repayment.

Loss of Revenue

The Prime Minister said that the government has lost LKR 6.6 billion (US$ 18.3 million) in revenue with the abolition of a tax system introduced in 2019. Inflation went up with money printing. LKR 2.5 billion was released into the economy from 2020 to May 20, 2022. There was chronic mismanagement of finances by government departments. The government is unable to provide funds to cover the losses of any of the state-owned enterprises.

Remedial Measures

On the proposed remedial measures, the Prime Minister said that with the help of the IMF, by 2024, Sri Lanka will have an economic stimulus package. By 2025, the budget could be balanced.

“We call on the International Monetary Fund to hold a conference to help unite our lending partners. Holding such a conference under the leadership of India, China and Japan will be a great strength to our country.  China and Japan have different credit approaches.  It is our hope that some consensus on lending approaches can be reached through such a conference,” the Prime Minister said.

Interim Budget

The interim budget will reduce unnecessary government spending, while controlling other costs, he said. On what is in it for the poor, Wickremesinghe said that the annual expenditure on providing various reliefs to the economically backward people will go up from US$ 350 million to US $550 million. Farmers’ loans would be written off 100%. Loans obtained by farmers with less than two hectares of land will be stopped immediately.

P. K. Balachandran

P. K. Balachandran is a senior Indian journalist working in Sri Lanka for local and international media and has been writing on South Asian issues for the past 21 years.

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