London, (16/11 – 57)

Sri Lanka President Ranil Wickremesinghe has laid out the bankrupt country’s budget for 2024, drawing mixed reviews as he strives to meet the demands of an International Monetary Fund bailout program without sowing further public resentment ahead of expected elections.

Some observers applauded the proposals, not only for what they included but also what they did not, no new taxes on top of hikes already announced. But others expressed concern that the budget seemed designed to placate certain voters, and only temporarily, while not doing enough to help the struggling masses.

Sri Lanka’s election-year budget was presented on 13 November, and it straddles line between IMF and its voters. The 2024 plan is praised for ‘sticking to reform,’ but criticized for the apparent contradictions not doing enough to help the struggling masses.

Wickremesinghe unveiled the budget on Monday, announcing his government’s plan to increase tax revenue to 3.82 trillion rupees ($11.67 billion), up from this year’s estimated 2.6 trillion rupees. Two weeks ago, the government had announced a value-added tax (VAT) increase to 18% from 15%, effective from January, as part of efforts to meet targets set by the IMF.

The fiscal deficit target is estimated at 2.85 trillion rupees, or 9.1% of gross domestic product, higher than the revised 8.5% of GDP for the current year. “We are aware of the difficulties faced by the people of this country. The path toward a stable and developed economy is not beautiful. It is difficult, hard and challenging,” Wickremesinghe said in his budget speech, following a recent uptick in protests demanding salary hikes to overcome high living costs.

The president described a country at a crossroads as it attempts to climb out of bankruptcy. “If we successfully navigate through this challenging period, we can create a free and decent society. Instead, if we continue to build sand castles by giving relief to the people based on political motives, the country will again be bankrupt.”

Still, Wickremesinghe proposed new relief measures for civil servants and pensioners. The plans call for handing out an additional 10,000 rupees in cost-of-living allowances to 1.3 million government employees, while raising allowances for 730,000 public pension recipients to 5,025 rupees from the current 2,500 rupees.

Sri Lankans are reeling from an economic crisis that has driven up the costs of essentials, although inflation has slowed.   Meanwhile, in a nod to the IMF, Wickremesinghe proposed a massive 3 trillion rupee allocation for foreign debt restructuring and the settlement of international sovereign bonds under the program. After Sri Lanka defaulted on its foreign debt in 2022, the fund came to the rescue earlier this year with a $2.9 billion bailout.

The country failed its first review of the program in September, but reached a staff-level agreement to unlock a new tranche last month.

According to Wickremesinghe, under the debt restructuring supported by the IMF, public debt is expected to decline from 129% of GDP in 2022 to 95% by 2032. He emphasized the benefits of this shift toward sustainability — greater macroeconomic and financial sector stability — for the nation of about 22 million people.

Wickremesinghe reported that reform measures implemented over the last 18 months have already resulted in significant improvements in Sri Lanka’s macroeconomic position. A primary budget deficit of 5.7% of GDP at the end of 2021 turned into a primary budget surplus in the first half of 2023, he said. Tax revenue grew 50% in the first six months of 2023, despite a deep economic recession. The inflation rate has dropped from 70% in September 2022 to 1.3% in September 2023, and foreign exchange reserves have recovered to above $3.5 billion.

“The economy is being healed due to the correct procedures and methodologies we followed during the past year, building the foundation of this system,” Wickremesinghe argued.

The budget receives much of both applauses and criticism.

Murtaza Jafferjee, chair of the Colombo-based Advocata Institute think tank, praised the president’s budget. “He is sticking to the reform and economic restructuring pathway and is not being excessively political,” he told Nikkei Asia. “This is the kind of budget that we always needed, and the language is not sugarcoated and it is factually correct.”

Mujibur Rahman, a member of parliament representing the opposition Samagi Jana Balawegaya alliance, pointed out what he sees as an inherent contradiction in the plan. “From January, they are increasing VAT, which means the cost of living will increase further, and at the same time they say they will increase the allowance for government workers. So, he is giving from one hand and taking it from the other.”

Sunil Adihettige, a driver employed by a private company in Colombo, was also disappointed. “I was hopeful that the president will announce some relief so that the prices of food items and our monthly bills will reduce. But he only said government employees will be getting a salary increase, but as we are in the private sector, we won’t even benefit from this.”

“Overall, businesses were significantly affected by extensive taxation, but people are adjusting to these increases as they had no other choice and also because they understood the country’s situation,” said Imtiaz Buhardeen, an entrepreneur and investor in Colombo. “The only fear was the possibility of additional tax increases on Monday, but it’s a big relief that there are no new increases.”

Ranjan Jayalal, a trade union leader, suggested the support for government employees was little more than a ploy. “The allowance is expected to be paid from April onwards, but after another couple of months, there will be elections, and then everything will change,” he said.

The next election must be called by September 2024.

Jayalal added that poor people are facing such hardship that many don’t even switch on the lights in their homes due to high electricity costs.

Source

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Brussels (08/11 – 50)

On March 20, the IMF approved a $3 billion Extended Fund Facility (EFF) to support Sri Lanka amid its economic crisis. The approval is expected to pave the way for other financial institutions to extend support to the bankrupt South Asian country. IMF program was made possible largely due to the untiring efforts of the President Ranil Wickremesinghe.

The IMF links financial assistance to a country to policy reform, a conditionality that usually imposes political as well as economic changes in the recipient nation. The logic behind IMF conditionality is multifold. It is supposed to prevent moral hazard by governments that receive loans. These conditions allow the IMF to monitor the behavior of the recipient states and allegedly promote best practices and good governance.

Sri Lanka has been to the IMF 16 times before; five of these since 2000. The full amount of the IMF loan was not disbursed on six occasions because Sri Lanka did not fully comply with the conditions of the loans. This included the previous EFF in 2016, when the conditions imposed by the IMF built additional pressure on the domestic economy. There has been much skepticism about Sri Lanka adhering to the more stringent IMF conditions this time around.

Despite the skepticism that prevails among journalists and economists, the IMF is very happy about the progress Sri Lanka is making on the commitments it made as a part of the IMF’s four-year EFF to the country.

An IMF delegation, which was in Colombo recently to assess the progress of the agreement, is optimistic. IMF Director of Asia and Pacific Department Krishna Srinivasan told a press conference in Colombo on May 15 that the Sri Lankan government has shown “commitment to the reform effort” that is a part of the agreement with the IMF.  He added that the “authorities are making good faith efforts to negotiate with all the creditors, both private creditors and official creditors.”

Ranil Wickremesinghe took over as President of Sri Lanka in July 2022 when the country was in the middle of its worst economic and political crisis since independence in 1948. On March 20, 2023, the IMF approved a $3 billion Extended Fund Facility (EFF) to support Sri Lanka amid its economic crisis.

Peter Breuer, IMF’s Senior Mission Chief for Sri Lanka, Asia, and Pacific Department said they “see things developing more or less in line with expectations.”

Srinivasan added that Sri Lanka had to complete a number of prior actions before the IMF approved its bailout package. These actions were extensive and required a significant commitment from the Sri Lankan government.

Among these are cost-reflective of a number of goods and services that the government had subsidized for decades.  Sarwat Jahan, the IMF Resident Representative in Sri Lanka said the Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) would have to recover their costs until the end of the IMF program.

The government met all these requirements, which shows that they are serious about implementing the reforms necessary to address the country’s economic crisis, Srinivasan said.

The conditions attached to IMF loans often involve actions aimed at discontinuing industry subsidies, avoiding exchange rate manipulation, adjusting budget priorities, and regulating wage levels. Leaders, who face diverse political limitations, differ in their willingness to engage in an agreement with the IMF and make compromises in these four areas.

Considering that IMF loan conditionality agreements usually involve implementing fiscal austerity measures, leaders with larger winning coalitions will encounter more challenges when attempting to negotiate an agreement for IMF financing.

On the other hand, when a regime maintains power through a narrower network of closely-connected supporters, he or she finds it easier to enter into an agreement with the IMF.

Miles Kahler, a senior fellow for global governance at the Council on Foreign Relations in Washington, DC, in his 1993 book chapter titled “Bargaining with the IMF: Two-Level Strategies and Developing Countries,” outlines two key aspects of domestic politics that influence the process of loan negotiations: firstly, the degree to which a technocratic elite is insulated from economic interests, and secondly, the frequency with which elites face political challenges like elections.

Another factor that can impede the formation of a loan agreement is the presence of multiple veto actors, such as a separation of powers or the existence of multiparty governing coalitions.

Kahler says that when a country has a higher number of veto actors capable of obstructing a loan agreement, the scope of domestic political consensus becomes narrower, resulting in increased negotiation costs for the IMF. Typically, the count of veto actors is determined by assessing the number of parties in a government coalition in countries where genuine political competition exists.

This explains why it was extremely difficult for former President Gotabaya Rajapaksa, who came into power through a coalition of populism and with the support of a number of interest groups, from big businesses to professional associations, to enter into negotiations with the IMF.

On the other hand, Wickremesinghe is the head of the United National Party, a political party that obtained around 250,000 votes from 15 million eligible voters. He has one MP in Parliament, Wajira Abeywardana, who is a staunch loyalist. Wickremesinghe is backed in parliament by the Sri Lanka Podujana Peramuna (SLPP), whose MPs depend on him for political survival and would vote for any legislation that he brings forth.

Sri Lankan legislators are entitled to several perks at the end of the full tenure of five years and most of the SLPP MPs that back Wickremesinghe are adamant on completing their terms. Wickremesinghe has also indicated that there will be no elections until the economy is stabilized and it is likely that the first election Sri Lankans will see is a presidential election, probably in 2024.

Therefore, Wickremesinghe can implement the IMF recommendations completely, as he is not answerable to any political coalition or interest groups. Neither does he face an election. Wickremesinghe’s personal ideology also aligns with that of the IMF. It is unlikely that these factors were ignored by the IMF when the loan was approved and when they evaluate whether Sri Lanka will adhere to IMF conditionalities.

Source

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Colombo Supreme Court rules that former President Gotabaya Rajapaksa and his brother, former Prime Minister Mahinda, were among several government officials whose conduct contributed to Sri Lanka’s worst economic crisis in decades.

Sri Lanka’s top court says ex-president Gotabaya Rajapaksa and his brother, former PM Mahinda are amongst those who contributed to the country’s worst economic crisis in decades.

The court was ruling on a petition filed against 13 former officials by rights group Transparency International Sri Lanka (TISL) which said the Rajapaksa brothers and others were responsible for the crisis. “Their actions, omissions and conduct contributed to the crisis,” the ruling said. The court did not order any punishment, according to a statement by TISL.

The two Rajapaksa brothers, two former central bank governors and President Ranil Wickremesinghe were among those named in the landmark TISL petition. Wickremesinghe was prime minister at the time of the crisis.

“Looking forward, we hope that this acts as a warning to elected representatives and public officials as they make critical decisions that have serious implications on the lives of citizens,” said Nadishani Perera, TISL Executive Director.

Sri Lanka’s economy collapsed as it shrank 7.8% last year, pummelled by long power cuts, soaring inflation, a plunging rupee and record high interest rates caused by the worst financial crisis in over seven decades.

Source : Reuters

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Sri Lanka is mired in a deep political and economic crisis and the country’s then President Rajapaksa has flown out of the country, days after a huge crowd of protesters stormed his residence in July 2022. Protesters for months have demanded the resignation of President Gotabaya Rajapaksa, whose government has been blamed for chronic mismanagement of the country’s finances.

The island nation of 22 million people has suffered months of lengthy blackouts, acute food and fuel shortages, and galloping inflation in its most painful downturn on record.

Island nation of Sri Lanka is mired in a deep crisis, they ousted their president who fled the country days after a huge crowd of protesters stormed his residence in July 2022. The country’s 22 million people have suffered months of lengthy blackouts, acute food and fuel shortages, and galloping inflation in its most painful downturn on record.

Here is how the crisis unfolded:

April 1: State of emergency

Rajapaksa declares a temporary state of emergency, giving security forces sweeping powers to arrest and detain suspects, after a spate of protests.

April 3: Cabinet resigns

Almost all of Sri Lanka’s cabinet resigns at a late-night meeting, leaving Rajapaksa and his brother Mahinda – the prime minister – isolated. The governor of the central bank, having resisted calls to seek a bailout from the International Monetary Fund (IMF), announces his resignation a day later.

April 5: President loses majority

President Rajapaksa’s problems deepen as finance minister Ali Sabry resigns just a day after he was appointed. The embattled leader loses his parliamentary majority as former allies urge him to quit. He lifts the state of emergency.

April 10: Medicine shortages

Sri Lanka’s doctors say they are nearly out of life-saving medicines, warning that the crisis could end up killing more people than the coronavirus.

April 12: Foreign debt default

The government announces it is defaulting on its foreign debt of $51bn as a “last resort” after running out of foreign exchange to import desperately needed goods.

April 19: First casualty

Police kill a protester, the first casualty of several weeks of anti-government protests. The next day, the IMF says it has asked Sri Lanka to restructure its colossal external debt before a rescue package can be agreed.

May 9: Day of violence

A mob of government loyalists bussed in from the countryside attacks peaceful protesters camped outside the president’s seafront office in Colombo. Nine people are killed and hundreds more injured in the reprisal attacks that follow, with crowds targeting those responsible for the violence and setting fire to the homes of politicians.

Mahinda Rajapaksa resigns as prime minister and has to be rescued by troops after thousands of protesters storm his residence in Colombo. He is replaced by Ranil Wickremesinghe, a political veteran who had already served several terms as premier.

May 10: Shoot-to-kill orders

The defence ministry orders troops to shoot on sight anyone involved in looting or “causing harm to life”. But protesters defy a new government curfew, which is rolled back at the end of the week. The top police officer in Colombo is assaulted and his vehicle set ablaze.

June 10: ‘Humanitarian emergency’

The United Nations warns that Sri Lanka is facing a dire humanitarian crisis, with millions already in need of aid. More than three-quarters of the population had reduced their food intake due to the country’s severe food shortages, the UN says.

June 27: Fuel sales suspended

The government says Sri Lanka is nearly out of fuel and halts all petrol sales except for essential services.

July 1: New inflation record

The government publishes data showing inflation has hit a record high for the ninth consecutive month, a day after the IMF asks Sri Lanka to rein in prices.

July 9: President’s house stormed

President Rajapaksa flees his official residence in Colombo with the assistance of troops, shortly before demonstrators storm the compound. He is taken to an undisclosed location. Footage from inside the residence shows jubilant protesters jumping in the pool and exploring its stately bedrooms.

Wickremesinghe’s residence is set on fire. Police say he and his family were not at the scene. Rajapaksa later offers to step down on July 13, parliamentary speaker Mahinda Abeywardana says in a televised statement.

July 13: President flees country

President Rajapaksa flies to the Maldives on a military aircraft, accompanied by his wife and a bodyguard. His departure comes after a humiliating airport standoff in Colombo, where immigration staff did not allow VIP services and insisted all passengers go through public counters.

July 21: Sri Lanka has a new president

Ranil Wickremesinghe was sworn in as the President of Sri Lanka.

Source: Al Jazeera

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