The crisis in Sri Lanka has lessons for everyone

On the day Wickremsinghe took office, he issued a candid assessment of the dire economic situation. The country lacks income and has no money for its expenses. In November 2019, he said Sri Lanka had $7.5 billion in reserves, which had just fallen to $1 million. He is presenting a draft budget within weeks and has warned of greater hardship than people are experiencing. It nonetheless raised hopes of relief later on through better economic management and international support.

Many believe that Wickremsinghe could be well placed to lead the country out of the crisis. During his previous five terms as Prime Minister, he had the necessary contacts with governments like Japan, China, India, the IMF and other donors to pull Sri Lanka out of this mess. Keeping the Ministry of Finance for himself, Wickremsinghe should lead the negotiations with the IMF himself.

Others are not too optimistic. As the single party in parliament, it does not enjoy broad support across party lines or among the public. His appointment may not help alleviate political instability. He and the president recently lost the first parliamentary test when the candidate they supported for the vice-presidency of parliament lost to another (Ajith) Rajapaksa who belonged to the SLPP.

For now, he appears to have assuaged public anger at the Rajapaksa family, widely blamed for bringing Sri Lanka to where it is. But other problems will arise once the draft budget is announced.

“People have been calling for system change, loud and clear. The appointment of Wickremesinghe does not meet this demand, so there is anger among people,” says Bhavani Fonseka, senior fellow at the Center for Policy Alternatives in Colombo.

“He is considered close to the Rajapaksa and has no credibility. Thus, the political stalemate in the country continues,” former Lanka President Chandrika Kumaratunga said in an interview.

The challenges it faces are immense. If there is no political stability, Sri Lanka cannot begin to deal with the economic emergency. The appointment of the new Prime Minister has not appeased protesters, who have vowed to continue their campaign for the ousting of President Rajapaksa.

The seeds of economic turmoil were actually sown during Mahinda Rajapaksa’s presidency from 2005 to 2015. Buoyed by his victory over the long-running Tamil insurgency, he borrowed heavily to spend on major infrastructure projects some of which were of little value economic. The economic slide went uncorrected during the tenure of his successor Maithripala Sirisena.

And Gotabaya Rajapaksa made two disastrous decisions when he came to power in 2019. First, he delivered on his election promise to deliver huge tax cuts, which meant the government suddenly lost a quarter of its revenue. Publicly inciting businesses and people, it was actually a ploy to win the parliamentary elections, which Rajapaksas won by a large margin.

In another surprise move, the president banned the import of all chemical fertilizers overnight, forcing Sri Lankan farmers to switch to organic farming altogether. Agricultural production has plummeted. Sri Lanka had to import rice for the first time. Food prices have suddenly risen, shocking people who used to get their staples on the cheap.

Against a backdrop of economic mismanagement, the pandemic has hit the economy massively. Tourists have disappeared, affecting foreign exchange earnings. The contribution of the tourism industry to the GDP fell from 5.6% in 2018 to 0.8% in 2020. But the government still spent a lot, which led to a depreciation of the currency.

At the start of 2022, the economy was in freefall. The government then postponed its visit to the IMF until March this year, hoping that returning tourists and help from China would get things moving. But just as tourism was beginning to recover, the conflict in Ukraine again drove up commodity prices, making imported fuel and food more expensive.

It is nearly impossible for the government to repay $7 billion in principal and interest due this year.

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

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

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