The announcement by the International Monetary Fund (IMF) in Colombo that it has reached a staff-level provisional agreement for a $2.9 billion package to bail Sri Lanka out of its worst economic crisis is the first step in the country’s long and painful road to recovery.
What is next?
The package must be approved by the IMF’s board of directors. The approval is contingent on Sri Lanka’s international creditors — commercial lenders such as banks and asset managers, multilateral agencies, as well as bilateral creditors including China, Japan, and India — agreeing to restructure its debt. Japan has offered to organise a creditors’ meeting for Sri Lanka, but China has yet to agree to the proposal.
Ahead of opening negotiations with the IMF in April, Sri Lanka pre-emptively declared it would default on its $51 bn debt, of which $ 2 billion is due this year, and the rest over the next six years.
The IMF package, to be paid in tranches over the next four years, is less than what India provided to Sri Lanka over four months. But the expectation is that an IMF loan can boost the receiving country’s credit ratings, and the confidence of international creditors and investors, who may then chip in to provide bridge financing to close the gaps between the tranches.
In an interview to the Economist, President Ranil Wickremesinghe — he has been in charge of the Finance Ministry since June when he was appointed Prime Minister — has said it will be 2024 before the country returns to its 2018 levels of prosperity. In the period between now and then, the government will need to take several belt-tightening measures — higher prices for utilities including electricity and fuel, and higher taxes.
World Bank senior mission chief Peter Breuer, right, and Masahiro Nozaki, mission chief for Sri Lanka, sit for a media conference in Colombo, Sri Lanka, Thursday, Sept. 1, 2022. (AP Photo/Eranga Jayawardena)
Belt-tighteners
On Tuesday, Wickremesinghe presented a slew of measures in the country’s budget aimed at increasing revenue to 15 per cent of GDP by 2025 from the 8.2 per cent at the end of 2021, reduce public debt, and a surplus of more than 2 per cent of GDP.
An increase in VAT from 12 to 15 per cent, and compulsory tax registration for everyone aged 18 years and older in order to widen personal income tax collections are among the measures. Some 50 state-owned enterprises are up for privatisation, apart from the big three — Ceylon Electricity Board, Ceylon Petroleum Corporation, and Sri Lankan Airlines — that are already in restructuring talks. The restructuring could yield up to $3 bn.
The age of retirement in government and semi-government organisations has been brought down to 60 from 65 and 62 respectively. Those beyond the age of 60 and still working are to be let go at the end of the year. Wickremesinghe told Parliament that this would address the unrest and the unemployment in the youth.
In the banking sector, staff and depositors are to be offered 20 per cent shareholding in state banks to address recapitalisation requirements arising out of non-repayment of loans due to the economic meltdown.
The government will also restructure the Board of Investment, which has been renamed as the National Agency for Public Private Partnership.
In a move to stem fears that the country’s social welfare system might be scrapped, the budget raised welfare payments to the farmers affected by the crisis, the elderly and disabled, and some categories of patients.
Seeking political stability
In order to push through the reforms without opposition, Wickremesinghe has been trying to form an all-party government but this has so far proved elusive. The first set of talks were held nearly a month ago. On Wednesday, in an indication of the difficulties ahead, a group of 12 Members of Parliament from the ruling Sri Lanka Podujana Peramuna (SLPP) coalition, which has lent its support to the Wickremesinghe (he is the only member of his United National Party in Parliament) government, sat on the opposition benches. The rebels include former minister GL Peiris.
Just a day earlier, in his budget speech, Wickremesinghe had reiterated an invitation to opposition parties to join hands with him in an all-party government, “since this unprecedented situation is the responsibility of us all”. He asked everyone to put their own political goals aside to join the effort to build a strong nation that would not be dependent on foreign loans so that “we can no longer be used as a tool of interference by other countries with strong economies”.
Geopolitics and the crisis
The last year has seen an intensification of the India-China rivalry in Sri Lanka. As India stepped up with lines of credit and other financial arrangements, it also managed to push through long pending projects in the country, such as the development of the Trincomalee oil tank farm. India’s biggest industrialist visited and quietly entered into an agreement with the CEB to set up wind farms along the Mannar basin, even as the Chinese publicly berated a “third party” for pushing Colombo to cancel a Chinese renewable energy project in three islands off Jaffna peninsula.
The contract was awarded to an Indian firm after New Delhi conveyed security concerns about locating a Chinese project in close proximity to the Tamil Nadu coast. During this time, Sri Lanka, which takes pride in a “balanced” foreign policy, sought to allay domestic concern that the country was becoming “the meat in an India-China sandwich”.
Colombo’s permission to a Chinese military ship to dock at the Chinese built Hambantota port heightened that sentiment, even as Sri Lankans defended the move on social media as reclaiming the country’s foreign policy. But as China and India sparred over the ship, first China and in response India, appeared to link the episode to US House of Representatives Speaker Nancy Pelosi’s visit to Taiwan.
In the Economist interview, Wickremesinghe spoke of his “worry” that big power rivalry could spread to the Indian Ocean. “But I think we have to face up to that situation and work with everyone” with “a clear policy”, he said. He described India as “the net security provider in the area”, and said “all other countries can also be present as long as it doesn’t lead to rising tensions or increase rivalry between states”.
Sri Lanka’s heightened awareness of its strategic location in the Indian Ocean in the light of the tussle finds reflection in the budget. Through the crisis, there were calls to cut defence expenditure, which had ballooned under Wickremesinghe’s predecessor and former soldier Gotabaya Rajapaksa. While the budget is silent on cuts, there is an entry under the head of National Security 2030, proposing to “review” the defence strategy and bring it in line with modern and evolving requirements of a “geo-politically important country.
A woman bargains as she buys vegetables at a market place in Colombo, Sri Lanka, Friday, June 10, 2022. (AP Photo/Eranga Jayawardena, File) 
World Bank senior mission chief Peter Breuer, right, and Masahiro Nozaki, mission chief for Sri Lanka, sit for a media conference in Colombo, Sri Lanka, Thursday, Sept. 1, 2022. (AP Photo/Eranga Jayawardena)
Share
