When Ranil Wickremesinghe took over as Sri Lanka’s president in July after a popular uprising ousted his predecessor, the South Asian island nation was engulfed in its worst economic meltdown in 75 years.

Since then, President Wickremesinghe has managed to a keep a lid on mass protests, improve supplies of essentials and on Monday, secured a nearly $3 billion bailout from the International Monetary Fund (IMF) that opens the door to restructuring about $58 billion of debt and receive funding from other lenders.

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.

He has done that despite a deeply unpopular government, his own party commanding just one seat in the 225-member parliament and having to rely for support on the party of the man he replaced.

Hours-long power cuts and queues for fuel that led to the downfall of former President Gotabaya Rajapaksa are gone, thanks partly to a fuel rationing system. Tourists are returning, remittances are recovering and foreign exchange reserves are rising, though the economy is still contracting. But due largely to significant hikes in income taxes and power tariffs that were needed to get the IMF on board, the government of the 73-year-old is no favourite of the people. According to a “Mood of the Nation” poll run in February by private think-tank Verité Research, the government’s approval rating was 10%, the same as in October but higher than an all-time low of 3% in June, when Rajapaksa was in power. Only 4% were satisfied with the way things were going in Sri Lanka, down from 7% in October but higher than 2% in June.

There are no known approval ratings for Wickremesinghe as president. “He’s ready to face the people’s anger in the short term, to ensure long-term stability and growth in the country,” said Dinouk Colombage, Wickremesinghe’s director of international affairs. “Even though the president only has one seat in parliament, him carrying forward his agenda, bringing forth the reforms, once the results start showing, I think the people will come out in open support of him.”

Born into a prominent family of politicians and business-people with large interests in the media, the lawyer and six-time prime minister has little support beyond wealthy urban voters. His ability to make policy depends to a great extent on the support of the Sri Lanka Podujana Peramuna party, largely controlled by the Rajapaksa family.

For now, Wickremesinghe is enjoying that support, and he said on Sunday that his country was on the right track There’s fuel now, there’s electricity, there’s fertiliser and by April, there will be enough rice and other foodstuff,” he said at an event in Colombo. “We will no longer be declared a bankrupt nation, but a nation that can restructure its debts.”

The bailout is expected to catalyse additional external support, with funding expected from the World Bank and the Asian Development Bank to the tune of $3.75 billion, the IMF said in a statement.

In recent months, Wickremesinghe successfully negotiated economic support from top lenders China, India and Japan, culminating in the IMF bailout. He flew to Japan in October to apologise for the cancellation of Japanese-funded projects under Rajapaksa, which convinced Tokyo to back Sri Lanka’s request for the IMF bailout.

The Paris Club of creditors, which includes Japan, earlier this year gave financing assurances to support the IMF deal. A Japan-funded $1.8 billion light-railway project, which was suspended in 2019, is among infrastructure projects that Sri Lanka is now trying to restart.

But Sri Lanka still needs to renegotiate its debt, a potentially drawn-out process where Wickremesinghe, who is also the finance minister, will have to deal with demands from China, India and other creditors. He still has to turn around the economy, which shrank 7.8% in 2022 and is expected to contract by 3% this year.

Implementing further reforms under the IMF programme, reducing record-high interest rates and controlling inflation will also continue to pose challenges for Wickremesinghe, who has faced trade union strikes after the tax and power hikes.

Critics say Wickremesinghe’s economy-first approach ignores political and systemic reforms – like stronger anti-corruption measures and more transparency in government decision-making – as demanded by mass protesters who banded together as the “Aragalaya” movement last year.

“One year on, there is no real structural change in governance or system change,” said Bhavani Fonseka, senior researcher at Colombo-based Centre for Policy Alternatives. “The president does take this line that his priority is addressing the economy over everything else, but you can’t have that silo-ed approach and think people are going to be okay with it.”

A crisis-weary public may still have to absorb years of continuing hardship as Sri Lanka tries to fix its economy during the four-year IMF programme, warned Jayadeva Uyangoda, a senior political analyst. “Wickremesinghe has managed to neutralise the Aragalaya and that was a major success, but the economic and social crisis goes on,” he said.

“Economic stability will take at least another couple of years.”

Source : Reuters

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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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Berlin (3/11 – 40)

Sri Lankan President Ranil Wickremesinghe will visit China in the upcoming week as the crisis-hit country makes progress on debt restructuring talks with its biggest lender.

Wickremesinghe took office in July last year, after a popular uprising, brought on by an economic meltdown, had forced his predecessor out of power. His Oct. 15-19 visit to Beijing will be his first to China since then.

Sri Lankan President Ranil Wickremesinghe, who is also finance minister, has been leading Sri Lanka’s push to manage its heavy debt and keep funds flowing from a $2.9 billion International Monetary Fund (IMF) programme. He will visit China to continue debt talks.

Wickremesinghe, who is also finance minister, has been leading Sri Lanka’s push to manage its heavy debt and keep funds flowing from a $2.9 billion International Monetary Fund (IMF) programme.

He will attend a Belt and Road Forum in Beijing that would mark the 10th anniversary of the initiative championed by China’s President Xi Jinping to develop global infrastructure and energy networks.

Wickremesinghe is expected to meet Xi on the sidelines of the forum, said the source who declined to be named as he was not authorised to speak with the media. The Sri Lankan leader intends to meet China’s finance and foreign ministers too.

Sri Lanka owes Chinese lenders – bilateral and commercial – around $7 billion. It reached an agreement with the Export-Import Bank of China on Thursday covering about $4.2 billion of outstanding debt but is still working with other key bilateral creditors including Japan and India on reaching a debt restructuring plan.

Sri Lanka defaulted on its foreign debt in May last year after its dollar reserves fell to a point where the island nation of 22 million people could no longer pay for essential imports like fuel and medicine.

Sri Lanka needs to reach agreements with creditors to push forward its first review of the IMF programme, which will release a second tranche of about $334 million. The first tranche was released in March.

The country has been a key receiver of loans under China’s Belt and Road infrastructure drive, helping it to build highways, a port, an airport and a coal power plant.

Source

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