Debts and Downfalls: Sri Lanka
Protests and a new President have done little to solve Sri Lanka's economic crisis. The Red Line’s Robbie Sutton provides an update on his earlier reporting in May to bring us up to speed on recent developments.
This year has been a turbulent one for Sri Lanka, with populist protests in response to the economic crisis successfully forcing President Gotabaya Rajapaksa from power. With the economy still suffering and debts mounting, the new President has to navigate a divided parliament, international debtors, and a population still clamouring for change.
Within the Sri Lankan Parliament following the 2020 elections, the now disgraced Rajapaksa family operated as the core leadership of the Sri Lankan People’s Freedom Alliance. This electoral bloc, comprising their own Sri Lanka Podujana Peramuna (Sri Lanka People’s Front or SLPP) and 16 other parties, sought to hitch their fortunes to the popularity of the Rajapaksas.
In the ongoing crisis, however, this popularity has largely evaporated and transformed into more of a political anchor. In early April, a mixture of individual defections from the SLPP and the exit of coalition partners Sri Lanka Freedom Party and the minor socialist and communist parties collapsed the bloc’s parliamentary majority. After his supporters publicly attacked protestors in May, Mahinda Rajapaksa was compelled to resign from the Prime Ministership.
Gotabaya chose Ranil Wickremesinghe to take his place, a veteran politician and on-again-off-again ally who, at the time, was sitting independently in the parliament after having split from the main opposition faction prior to the 2020 election. Wickremesinghe was no stranger to the role, this being his sixth time as PM.
Although the appointment of Wickremesinghe was supposed to pave the way for a unity government, as of the time of writing, no agreement has been reached, and the unrest on the streets continues unabated. Protestors would dramatically storm Gotabaya’s residence (amongst other locations) on 9 July and Gotabaya himself would flee to Singapore, before later moving to Thailand. Gotabaya would not return to the country until the beginning of September.
"Although the appointment of Wickremesinghe was supposed to pave the way for a unity government, as of the time of writing, no agreement has been reached, and the unrest on the streets continues unabated."
With Gotabaya’s abrupt departure, a new President was naturally required; on 20 July Wickremesinghe would be elected to the post by a Parliamentary vote to finish out Gotabaya’s original term.
While Sri Lanka’s parliament has bickered amongst itself, the situation on the streets and for the populace has worsened. Shortages of essential medical supplies, food, and fuels have been commonplace since February. By July these shortages were almost ubiquitous, thanks to significant rates of inflation and worsening food security: an estimated 6.3 million or “3 in 10 households” are classified as being ‘food-insecure’by the World Food Program.
A New Challenger Approaches
Wickremesinghe is the public face of the efforts made by the Sri Lankan government to address the economic crisis: a veteran politician with ties to both major factions in parliament with a reputation as a Western-facing reformer. Wickremesinghe is the only sitting member of his party, the United National Party (UNP), after a disastrous showing in the 2020 elections. The party split from the newly formed Samagi Jana Balawegaya bloc at the eleventh hour amidst a dispute with emerging leader Sajith Premadasa.
Wickremesinghe has sought to restore the former relationship, repeatedly appealing to the opposition bloc for a ‘unity government’. But his effective defection from the SJB (a bloc that was itself originally formed and led by the UNP to contest the 2019 Presidential race) to the side of Rajapaksa’s SLPP has not been helpful in this regard.
The new President is faced with both restoring a fraying socio-political order on the streets and re-establishing a collapsed economy. Regarding the former, his caretaker administration has been criticised for its handling of the protest movement, declaring a state of emergency ahead of the July vote for a new President. This move has drawn condemnation from Human Rights Watch (HRW) due to the sweeping powers granted to police and the armed forces, including allowing life imprisonment for otherwise minor offences.
Wickremesinghe himself describing the Aragalaya (meaning ‘struggle’) protestors as “fascists” and intensified efforts to crack down on protestors taking part in militant actions, such as those who stormed Gotabaya’s residence, and who held rallies in defiance of court orders. HRW has also reported an increasing pattern of both physical attacks and “legal reprisals” carried out by security forces and the courts after Wickremesinghe’s ascent to power on 22 July. Wickremesinghe has not proven popular with the Aragalaya protestors, and is generally seen as little more than a front for the Rajapaksa-aligned section of the (Sinhalese) ruling elite, due to his crackdown and his ascension (first to the Prime Ministership and then Presidency) coming with the support of the SLPP.
"HRW has also reported an increasing pattern of both physical attacks and “legal reprisals” carried out by security forces and the courts after Wickremesinghe’s ascent to power on 22 July."
On the economic front, he has been open about his intention for liberal economic reform, claiming that “state monopolies” must be done away with and an “open economy” must be returned to. He has stated that his top priorities were reducing or mitigating inflation, with the intent of doing so through strict limitations to the supply of money, protecting and strengthening the financial and banking systems, and announcing a need to “restructure” the Electricity Board, Ceylon Petroleum Corporation and Sri Lanka Airlines.
To address the critical shortages of foreign currency and to access further credit, the new government has reached out to Japan, seeking financial support and diplomatic influence with members of the ‘Quad’ security dialogue and potentially other creditors. For its part, Japan has echoed this call for a multilateral negotiation and began to organise a combined meeting of creditor nations. The outreach via Japan is noteworthy, given that it is China who holds the largest single portion of debt, between 10 and 19.9 per cent depending on how exactly national ownership is counted.
The relatively broad geopolitical distribution of Sri Lanka’s creditors is likely to be the biggest potential stumbling block for any multilateral agreement towards ending or mitigating the crisis. This is unlikely to represent any substantive geopolitical shift on the part of the new government however, and relations between China and Sri Lanka remain positive. The growing tension and conflict between China and the nations of the Quad, most of whom are major debt holders, might prevent moves towards the restructuring of Sri Lanka’s debt. Should any party seek to extract significant concessions from the other in exchange for its assent, or seek to weld Sri Lanka to its side geopolitically, any sort of multilateralism would collapse, leaving Sri Lanka even further in economic distress.
The Bourgeoise Cometh
Wickremesinghe’s government will be negotiating not only with creditor states, but also the Bondholder Group, representing private investors. According to Reuters, the group comprises of “more than 30 asset managers”, and includes HBK Capital Management, BlackRock, and Morgan Stanley Investment Management amongst its ‘steering committee’. Additionally, the Hamilton Reserve Bank Ltd, which according to Bloomberg holds over $250 million (some 25 per cent of the aggregate bond debt which was due in July) of Sri Lankas’ ISB debt, is currently suing the Sri Lankan government in an American court over its default.
The bank stated in its complaint that the terms of the default create a “selective exclusion” for Sri Lankan banks and institutions (in violation of so-called Equal Treatment Provision), while international creditors are compelled to accept the restructure. They also allege that Rajapaksa’s extravagant corruption is the main cause preventing Sri Lanka from fulfilling its obligations. Despite its current complaints, the St Kitts and Nevis-based bank interestingly has historic connections with the Former Central bank Governor Ajith Nivard Cabraal, who controversially signed off on the $500m ISB payment made by Sri Lanka on 18 January.
The other major non-state player in this situation is the International Monetary Fund. Sri Lanka has a long history with the IMF, having taken numerous loans from them going back as far as 1965. More recently the Rajapaksa government was relatively resistant to this relationship, preferring bilateral loans from states or the issuance of ISB’s for raising capital, and this aversion to the IMF extended into the early days of the crisis.
Negotiations for an IMF bailout only began in May and came to little. The August round under the Wickremesinghe presidency did conclude with a so-called “staff-level agreement”, allowing for an “extended fund facility” loan worth $2.9 Billion over 48 months, according to the IMF’s Press Office. On paper this arrangement will give the Sri Lankan government the funds it needs to operate during the period of negotiation with credit-holders, and to fund an IMF-approved policy package developed by the Wickremesinghe government. The principal objectives of this package are increasing the revenues available to the state, the use of “cost-recovery pricing” to “minimise fiscal risks arising from state-owned enterprises”, raising social-spending, restoring “price stability” through monetary reform and the restructuring of the Central Bank, rebuilding Foreign Exchange reserves, and the reduction of corruption.
Although it may be tempting to see this EFF loan and the intended reform package as the ‘light at the end of the tunnel’, the road ahead for Sri Lanka will continue to be a rough one. The full effects of these reforms remain to be seen, assuming firstly that they pass through Parliament smoothly (which, given that the SLPFA no longer commands a majority is very much up in the air), and secondly, that no untoward side-effects arise.
"Although it may be tempting to see this EFF loan and the intended reform package as the ‘light at the end of the tunnel’, the road ahead for Sri Lanka will continue to be a rough one."
While the Government has announced increases to the value-added tax, as well as some write-offs for farmers debts and increases to public welfare, further legislative changes (potentially even the entire IMF deal) will require opposition (mainly the SJB bloc) support. Until, and indeed if, these reforms bear fruit, the government will remain constricted by the significant debts it has accumulated. As those debt activists and scholars more critical of the IMF such as Eric Toussaint have pointed out, Sri Lanka is taking new loans in order to pay down older ones, leaving the overall economic situation unchanged. Sri Lanka was already putting as much as 40 per cent of its governmental spending towards servicing various debts (not all of which can be laid at the Rajapaksa’s feet), at a not insignificant cost to its people.
The critical position Sri Lanka now finds itself in gives a great amount of leverage to its various creditors, both state and private, whose main interest in the policy reforms being demanded will be ensuring their ultimate repayment. Furthermore, the structural conditions which made Sri Lanka vulnerable to this crisis in the first place aren’t addressed (and perhaps cannot be) by these reforms.
As long as Sri Lanka remains low on the global industrial value chain, possessing only a handful of industries (principally tea and garments, along with the COVID-19 affected tourism industry) with which to generate significant revenues, it will thus be reliant on foreign capital either through direct investment or loans, perpetuating the risk of a renewed crisis.
Written by Robbie Sutton.
Edited by Wade McCagh.