Despite riding a wave of anti-corruption and anti-establishment sentiment, Dissanayake’s promise to renegotiate some austerity measures entails great economic risk and is unlikely to succeed. Yet his presidency can still lay the path for a reformed, more compassionate Sri Lanka — and should be given the benefit of the doubt.
By Ganeshan Wignaraja l East Asia Forum
On 23 September 2024, Anura Kumara Dissanayake, a left-leaning candidate, was sworn in as the President of Sri Lanka. This was the first election held since mass protests overthrew the country’s former president Gotabaya Rajapaksa in July 2022, after Sri Lanka defaulted on its sovereign debt and suffered a crippling economic crisis.
Dissanayake won a free election with a total of 5,740,179 votes to 4,530,902 for his nearest rival Sajith Premadasa — the first time preferential votes had to be counted. With a 75 per cent turnout, the election confirms Sri Lanka’s status as one of Asia’s oldest and most vibrant 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 the Marxist Janatha 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 its electoral alliance — the National Peoples Power — as a soft-left party capable of democratic government.
Dissanayake’s manifesto: ‘A Thriving Nation, A Beautiful Life, August 2024’, advocated pro-poor welfare policies, robust anti-corruption measures, and a production-oriented, small-business economy. This caught the attention of voters, whowanted systemic change after the economic crisis. Dissanayake is inheriting a stabilising economy from his predecessor, Ranil Wickremasinghe, an experienced centre-right politician who represented the political status quo.
Gains Over Decades Reversed
The long queues for fuel during the crisis have disappeared. Consumer Price Index inflation is in the single 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.
This turnaround is linked to a mix of 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 receiving a tough US$3 billion International 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 per day poverty line has doubled to 25 per cent since 2022. Child malnutrition has increased as families switched to cheaper, less healthy diets.
Debt Repayments Looming
Debt repayments are also looming. Official bilateral creditors agreed to a debt restructuring deal in June 2024, and a restructure with private creditors in September. 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 tourism and 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 — notably the primary surplus requirement of 2.3 per cent of GDP, the Central Bank Act and Debt Sustainability Analysis parameters.
Prolonged negotiations with the IMF may result in interruptions to its IMF programme and external financing drying up. Once Sri Lanka does not have an IMF programme, as in 2021–22, nobody will provide it with 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 risks extreme hardship.
A pragmatic approach for Dissanayake is to continue with elements of the current economic stabilisation program, adding structural reforms for long-term growth, while addressing his campaign promises around good governance and reducing poverty.
Compassionate, Efficient Transformation
Sri Lanka should build a cross-party consensus on economic direction to ensure policy consistency and foster investor confidence and ensure external and domestic debt sustainability through proactive debt management and strengthened legal frameworks. The central bank’s independence should be strengthened to enable effective monetary policy and financial stability, and Sri Lanka should support fiscal sustainability through transparent budgeting, spending controls and better tax administration. Undertaking pragmatic efforts to support economic transformation by streamlining business regulations and promoting trade are also essential. Growth should be made inclusive by 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 given the benefit 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 the consequences of failure are high.
Ganeshan Wignaraja is Visiting Senior Fellow at ODI and Professorial Fellow in Economics and Trade at Gateway House.
This article has been sourced from the East Asia Forum of the Australian National University.
