By Ganeshan Wignaraja
On 23 September 2024, Anura Kumara Dissanayake, a left-leaning candidate, was sworn in asthePresident of Sri Lanka. This was the first election heldsincemass protests overthrew the country’s former president Gotabaya Rajapaksa in July2022, after Sri Lanka defaulted on its sovereign debt and suffered a crippling economic crisis.
Dissanayake won a free election with a total of5,740,179 votes to 4,530,902for his nearest rival Sajith Premadasa — the first time preferential votes had to be counted.Witha75 per cent turnout, the electionconfirmsSri Lanka’s statusas one of Asia’s oldest andmostvibrant multiparty democracies.
It is a remarkable victory for a political outsider. Dissanayake, a former agriculture minister and longstanding member of parliament, is the leader of theMarxistJanatha Vimukthi Peramuna, which conducted armed uprisings in 1971 and 1988–89. Dissanayake overcame voters’ apprehensions thanks to his charismatic personality and by repositioning the Janatha Vimukthi Peramuna and itselectoral alliance —the National Peoples Power —as a soft-left party capable of democratic government.
Dissanayake’smanifesto:‘A Thriving Nation, A Beautiful Life, August 2024’, advocated pro-poor welfare policies, robust anti-corruption measures, and a production-oriented, small-business economy. Thiscaughttheattentionofvoters,whowanted systemic change after theeconomic crisis. Dissanayake is inheriting astabilising economyfrom his predecessor, Ranil Wickremasinghe, an experienced centre-right politician who represented the political status quo.
The long queues for fuel during the crisis have disappeared. Consumer Price Indexinflation is inthesingle digits, compared to a peak of 70 per cent in October 2022. The Central Bank of Sri Lanka is projecting 4 per cent economic growth in 2024, compared to a 7.8 per cent contraction in 2022. Usable foreign reserves are up to US$4.6 billion, versusUS$25 million in April 2022.
Thisturnaround islinked toamixof decisive stabilisation measures by Wickremasinghe’s administration, such as hiking interest rates, removing fuel subsidies, raising taxes and passing a law to improve the independence of the Central Bank. Sri Lanka is also receivinga tough US$3 billionInternational Monetary Fund (IMF)Enhanced Fund Facility emphasising revenue-based fiscal consolidation and governance reforms, US$5 billion financing from multilateral development banks and US$4 billion of Indian aid.
Sri Lanka’s previous poverty reduction gains over decades have been reversed. The percentage of people living beneath the US$3.65 perday poverty line has doubled to 25 per cent since 2022. Childmalnutritionhasincreasedas families switched to cheaper, less healthy diets.
Debt repaymentsare also looming.Official bilateral creditors agreed to adebt restructuring dealin June 2024, and a restructurewith private creditorsinSeptember. Based on the agreement with official creditors and the framework reached with private creditors, Sri Lanka must be able to service all its external debt and meet its import requirements by 2028.
Sri Lanka needs annual growth of 5–6 per cent,led by tourismand other export industries, over the next several years to reduce poverty and earn foreign exchange for debt repayments.
The National Peoples Power say they want to work with the IMF’s Enhanced Fund Facility framework but renegotiate some austerity measures. This may have resonated on the campaign trail but carries economic risks. The key structural benchmarks under the Enhanced Fund Facility are fixed— notablythe primary surplus requirement of 2.3 per cent of GDP, the Central Bank Act andDebt Sustainability Analysisparameters.
Prolonged negotiations with the IMF may result in interruptionsto itsIMF programme and external financing drying up. Once Sri Lanka does not have an IMF programme, as in 2021–22, nobody will provideitwith any external financing. Sri Lanka barely has 2–3 months of import cover in terms of foreign reserves to finance essential imports of fuel, food and medicine. Leaving the IMF’s programme risksextreme hardship.
A pragmatic approach for Dissanayake is to continue with elements of the current economic stabilisation program, adding structural reforms forlong-termgrowth, whileaddressinghis campaign promises around good governance and reducing poverty.
Sri Lankashouldbuild a cross-party consensuson economic directionto ensure policy consistency and foster investor confidenceandensure external and domestic debt sustainabilitythrough proactive debt management and strengthened legal frameworks. The central bank’s independenceshould be strengthened to enable effective monetary policy and financial stability, andSri Lanka should support fiscal sustainabilitythrough transparent budgeting, spending controls and better tax administration. Undertaking pragmatic efforts to support economic transformationby streamlining business regulations and promoting tradeare also essential.Growth should be made inclusiveby prioritising targeted social protection, safety nets and food security.
Dissanayake has a historic opportunity to bring about a compassionate and efficient transformation of Sri Lanka out of crisis. His administration should be giventhebenefit of the doubt to implement their program. To mitigate uncertainty and reassure Sri Lanka’s creditors, the new National Peoples Power administration can build on the post-July 2022 macroeconomic policy framework — an independent central bank, prudent fiscal policy and open trade and investment policies — all while tackling poverty and corruption.
Sri Lanka’s development partners have a huge stake in working these issues through with the new administration,as theconsequences of failureare high.
