Sri Lanka’s heterodox new leader to face a very complicated economic situation
Anura Kumara Dissanayake, leader of the National People's Power (NPP) party, greets people as he leaves the election commission after claiming victory in the presidential election in Colombo, Sri Lanka, 22 September 2024 (REUTERS)
Marxist-leaning Anura Dissanayake was elected as Sri Lanka’s first President since the country’s deepest economic crisis following its first sovereign default in 2022. Despite signs of recovery thanks to the help of IMF’s $3 billion bailout, challenges remain ahead for the debt-ridden country as the government faces a dilemma of fiscal austerity and household poverty.
The election closed on Sunday records a historic 75% turnout rate with 42% votes going to the President-elect. Despite the wide expectation of a three-way race ex ante, the incumbent leader Ranil Wickremesinghe soon found him outnumbered after the count began. The other competitor, Sajith Premadasa of the opposition, lost to Dissanayake by about 10 percentage points in both rounds of counting. Marking the first third-party candidate to be elected President, Dissanayake’s succession clearly reflects the Sri Lankan people’s call for change.
As IMF’s total disbursement mounts to $1 billion, Sri Lanka is gaining traction on rebuilding its wounded economy. Positive GDP growth was achieved in last 4 quarters thanks to the improving consumption as households’ purchasing power restores on the fast-cooling inflation, which stands at a benign 2.5% as of July. Sri Lanka’s rebooted forex reserves have also anchored the market’s expectation of USDLKR, and therefore shored up its external balance. The resiliency of oversea remittance and import austerity have brought in positive current account balance for 7 consecutive quarters as of March 2024. As a result, the forex reserves have accumulated from $1.6 billion in 2022 to $5.6 billion as of July, enough to cover 4 months of national imports.
However, the economic challenge awaiting Dissanayake is more compelling than it appears. First, the economy is still far below pre-pandemic trend. Second, the tax reforms supervised by IMF to consolidate Sri Lanka’s fiscal balance is taking a heavy toll on households as poverty rate nearly doubled to 26% during 2021-2023. The people’s massive discontent with status quo contributed a crucial part to Dissanayake’s success as he promised to renegotiate terms with IMF and support lives of the poor. However, it is yet to be seen how the new government will deliver this any time soon, especially as Dissanayake vowed to dismiss the parliament as soon as he takes office. And even though Dissanayake has expressed commitment to cooperating with IMF in any scenario, it adds more uncertainty to IMF’s approval of subsequent disbursements and risks disrupting Sri Lanka’s fragile recovery.
Beside of support from IMF, many believe Dissanayake will lean to China on geopolitical front as opposed to India considering the communist nature of his Janatha Vimukthi Peramuna party (JVP). However, it remains unclear how close the two countries will be given Dissanayake’s caution about foreign investment as he vows to increase inspection to rule out potential debt trap, as shown in his plan to repeal a wind power project endorsed by India’s Adani group. Also, Dissanayake’s visit to India earlier this year may suggest that he would rather leverage Sri Lanka’s geopolitical value to mediate between China and India for its maximized interest than completely relying on either of the two.
Moving forward, Sri Lanka’s way of coming back will be long and bumpy. There is not yet a formula in sight to achieve stable growth before the debt grace period expires in 2028. With geopolitical tensions rising worldwide, Sri Lanka will need to tread more carefully when seeking for support.
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