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Battered & bruised: Sri Lanka’s hard choices

Sri Lankans are appalled that a powerful political family elected to deliver a technocracy has returned the country to a familiar past where queueing and rationing were the order of the day (Photo: AP)Premium
Sri Lankans are appalled that a powerful political family elected to deliver a technocracy has returned the country to a familiar past where queueing and rationing were the order of the day (Photo: AP)

  • The debt-ridden island nation is coming to grips with harsh new realities
  • Food prices have skyrocketed; hospitals are running out of drugs. Can Ranil Wickremesinghe, the new prime minister, deliver?

COLOMBO : In suburban Colombo, queues for fuel run for a couple of kilometres, at any given time of the day. On Vesak weekend, a traditional holiday to mark the birth of Lord Buddha, many chose to stand in line at the crack of dawn for kerosene oil needed for firewood stoves, despite state announcements that fuel will not be available.

On Monday, the newly appointed prime minister Ranil Wickremesinghe announced that Sri Lanka only had petrol stocks to last a single day. Two more diesel shipments are to arrive under the Indian credit line, he said, while Sri Lanka must secure $75 million over the next couple of days to ease the queues. “For over 40 days, three ships with crude oil and furnace oil have been anchored within the maritime zone of Sri Lanka. We are working to obtain dollars in the open market to pay for these shipments," Wickremesinghe said in one of the most sobering briefings by a politician Sri Lanka has ever witnessed. “A quarter of electricity is generated through oil. Therefore, there is a possibility that the daily power outages will increase to 15 hours a day," he added.

Over the past months, Sri Lanka has seen several cargo ships anchored in international waters as the country struggled to make payments to clear shipments of fuel and other essentials. The result is an acute shortage of petrol, diesel and kerosene with public queuing in the sweltering heat for not just hours but days on end.

“I spent nearly four hours in the petrol queue and finally got to the pump. Was then told petrol had run out and the car in front of me got the last of the petrol. I nearly burst into tears. Then I heard what the Prime Minister said, and now I have the same feeling again," said Sandun Jayawardana, a journalist in Colombo, moments after the premier’s statement.

For months, these scenes of desperation have been familiar to most Sri Lankans. Although many are still in disbelief of how bad life has become, the masses are slowly adjusting to this new reality. With food prices skyrocketing, extensive power cuts, and hospitals running out of essential drugs, Sri Lankans are appalled that a powerful political family elected to deliver a technocracy has returned this island nation to a familiar past where queueing and rationing were the order of the day.

New PM, old challenges

Of late, Sri Lanka has also been the stage for high political drama. Early April, peaceful protests erupted across Sri Lanka, in a united call for president Gotabaya Rajapaksa to step down. On 9 May, his brother and prime minister Mahinda Rajapaksa, a revered and respected leader among the Sinhala Buddhist majority, was forced to step down, confirming reports of a split within the powerful family. Just hours before Rajapaksa’s resignation, pro-government supporters launched an attack on peaceful protestors, escalating violence across the country. The night of terror saw one ruling party parliamentarian lynched, dozens of houses torched and at least eight dead in clashes.

On Thursday, president Gotabaya Rajapaksa appointed longtime political opponent of the Rajapaksa regime, Ranil Wickremesinghe, as prime minister, a move that was criticized heavily by both politicians and public. Wickremesinghe, whose party has only one seat in the 225-seat parliament ,is now left to demonstrate confidence, to dispel any concerns on the legitimacy of his appointment and to pass any legislation that will see an end to the political stalemate. Soon after his appointment, Wickremesinghe invoked Winston Churchill, suggesting that the task of putting back together a broken island is no less formidable than taking on Churchill’s war room. “Churchill had only four members backing him in parliament. How did he become Prime Minister? Because of the crisis. I’ve done the same," Wickremesinghe told a British journalist.

73-year-old Wickremesinghe is a charismatic leader, quipped to be the grandmaster of political deals. The veteran politician made his surprise comeback last week becoming the only Sri Lankan leader to hold the prime minister’s office for six terms. The country’s main opposition party, a splinter group of Wickremesinghe’s United National Party, have accused him of sabotaging months of peaceful protests by the public, and called for Gotabaya Rajapaksa to step down. The public, meanwhile, are conflicted, with many seeing his appointment as evidence that Wickremesinghe has long been in cahoots with the Rajapaksa regime. Others have reluctantly supported Wickremesinghe, citing the urgency of achieving political stability.

Long before fuel queues were the norm of the day, Wickremesinghe predicted an economic meltdown, when the Rajapaksa loyalist Central Bank governor of the time, Ajith Nivard Cabraal, took on an alternative strategy dubbed ‘Cabraalnomics’ to cope with mounting challenges against dwindling foreign reserves.

Sri Lanka printed some two trillion rupees within two years in order to support a large cadre of state workers, increasing the country’s money supply by 42% between December 2019 and August 2021. Cabraal, in the face of severe criticism, continued to deny the links between money printing, inflation and depreciation, paving way for unfounded theories to take hold of the Gotabaya administration. This was in addition to ill-advised decisions by the government to slash taxes and to ban the import of chemical fertilisers, which led to severe crop losses and food shortages across the country.

According to former Central Bank governor Indrajit Coomaraswamy, the genesis of Sri Lanka’s economic woes lies with a fundamental problem of fiscal unsustainability. “We’ve had a balance of payments which has been in persistent deficit along with a current account deficit. So, we were the classical twin deficit country," he said during a forum organized recently by the Ceylon Chamber of Commerce.

“Problems were aggravated—fiscal deficit was affected by the dramatic decline in revenue. Upto the mid-1990s, revenue was around 20% of GDP. It has now come down to a little over 8%. Even before the pandemic and tax cuts, revenue was down to 13% of GDP and expenditure was 20%, so it was an inherently unsustainable situation," he said.

The underlying problems were amplified by tax cuts introduced by the Rajapaksa government, the pandemic, the war in Ukraine, and in Coomaraswamy’s view, the adherence for too long to the ‘alternate strategy’ introduced by Cabraal.

“Those underlying problems were amplified many times over by these proximate reasons, which led to us going to the International Monetary Fund (IMF) late, and getting our ratings downgraded, and losing access to capital markets," Coomaraswamy explained.

Two big buckets

By 12 April, Sri Lanka announced a pre-emptive default on its foreign debt totalling $51 billion, fresh on the heels of its decision to float the rupee and increase interest rates, in a bid to tighten the monetary policy. On 13 April, reserves were down to $5 million, the lowest reserves recorded.

“We are in this current mess because the government decided against going to the IMF knowing very well that there was no way to pay our debts. When you lose significant earnings from tourism and you don’t have the ability to issue sovereign bonds anymore, it is obvious that you are in trouble," explained Colombo-based economist and researcher Umesh Moramudali.

After months of rejecting the proposal, president Gotabaya Rajapaksa in March said his government was willing to enter talks with the IMF, agencies and countries on deferring loan payments, while requesting the public to make further sacrifices by limiting electricity and fuel consumption.

While commending recent moves by the new Central Bank governor, Coomaraswamy said the interest rate adjustments and fuel price revisions alone won’t suffice in the long-term. Sri Lanka has ‘two big buckets’ it has to address along with the negotiations to achieve an IMF programme, he said. “One is the fiscal framework, one that will get us on a path to debt sustainability. Two, electricity prices need to be adjusted significantly."

Coomaraswamy also expressed confidence that a staff level agreement with the IMF is likely to be achieved within four to eight weeks. “It is only the first step. The staff will then have to make a proposal to the executive board of the IMF for an Extended Fund Facility (EFF) which would give us about a billion dollars a year, over three years. For that to happen, we have to show significant progress towards debt sustainability," he said.

‘Beggars can’t be choosers’

In Sri Lanka’s hour of need, its closest neighbour India has offered humanitarian assistance to the tune of $3.5 billion, easing hardships felt on the ground to a great extent. But it has also been met with a great deal of skepticism on the part of the public, calling for greater transparency.

“Because this crisis has made Sri Lanka very vulnerable, it has allowed other countries to exploit the situation. You see the Trincomalee oil tank deal, which was dragging on for years, being signed all of a sudden. I personally don’t have anything against it. I would like to see Sri Lanka moving forward with public private partnerships with other countries, and proceed with that kind of economic reforms," Moramudali said.

Moramudali was referring to the agreement finalised this year between India and Sri Lanka to share ownership of the British era Trincomalee oil tank farm with the Indian Oil Corporation (IOC)—a deal that was decades in the making.

Moramudali believes credit lines from other countries allow them to sell what they want, leaving less choices for Sri Lanka. “But you see the problem again is that beggars can’t be choosers."

Asked if the crisis would mean a tilt towards China, Moramudali said as a developing country, Sri Lanka needs China, one of the biggest lenders in the world. “The popular narrative in the recent past has been that China has abandoned Sri Lanka. Yes, China’s support hasn’t been very proactive over the last six months. But, over the course of the last two years, there has been significant support from China. Economic recovery cannot take place without the support of China," Moramudali opined.

Meanwhile, former governor Coomaraswamy said that as China has been reluctant to restructure Sri Lanka’s debt, other creditors are carefully watching out for China’s next move. “We have got to the point that our reserves have declined to such a low level that we need some kind of restructuring, there has to be some kind of haircut. Other creditors won’t take a haircut, unless China is also willing to take a haircut," he cautioned.

Political deadlock continues

Prime minister Ranil Wickremesinghe’s debrief on Monday triggered alarm across the country as the nation came to grips with harsh reality. Payments have not been made for four months to medical suppliers, resulting in the blacklisting of the State Pharmaceutical Corporation, Wickremesinghe said. “Medical Supplies Division is unable to provide even two critical items of the 14 essential medicines we currently need. One used to treat heart disease and the other is the anti-rabies vaccine. The latter has no alternative treatment," he said.

As of Tuesday evening, Sri Lanka still does not have a finance minister, nor financial and legal advisors to move forward with negotiations. Former finance minister Ali Sabry, who was in Washington for the initial round of negotiations with the IMF, has refused to accept the portfolio citing personal reasons. Others, including prominent economist and former minister Harsha de Silva, too, have refused portfolios. A fresh wave of protests, meanwhile, have emerged demanding an independent police force, following accusations of state-sponsored violence last week.

The key challenge for premier Wickremesinghe now is to find suitable candidates for portfolios and convince opposition MPs to form an interim government, while demonstrating to the protestors that he is acting in their interest. In principle, several parties and independents have agreed to conditionally support a government under Wickremesinghe, but have refused ministerial portfolios, stating that the people of Sri Lanka cannot be betrayed.

Colombo based economist Chayu Damsinghe opines that the manner in which Sri Lankan leaders communicate the issues will remain crucial in building stability. “We are not talking about things immediately turning for the better. Things will get worse. You are talking about a lot of people having less disposable incomes and having to make consumption choices. There are a lot of challenges in the short-term," Damsinghe said.

Building enough trust and credibility with the people, and convincing them that the pain they are going through is not permanent will be challenging to the political establishment, he said.

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