Sri Lanka’s steps towards the end of the heat wave – Analysis – Eurasia Review

June 12, 2022

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With progress towards political stability and the assurance of broad external support, there is hope that Sri Lanka will overcome the crisis.

After months of economic distress, peaceful expressions of public anger punctuated by indiscriminate violence, political strife and institutional instability, Sri Lanka now seems on the road to a return to normalcy.

There’s no denying that the winding queues for fuel and cooking gas are still there, and the prices for basic necessities are sky-high. Some basic necessities such as powdered milk have either disappeared from the market or are too expensive. But the power supply has improved significantly, putting an end, so to speak, to an “age of darkness”.

The term of government, which had ceased to run in several parts of the country, including the critical space outside the president’s office in Colombo, has been reinstated. The threat of disciplinary action prevented a strike by Ceylon Electricity Board engineers, which would have cut power to the entire island. The engineers demanded the cancellation of two energy projects financed by the foreign private sector, including one by the Adanis of India.

As India continues to deliver essentials like food, fuel, fertilizer and medicine to the best of its ability, China has finally come out of its shell and signaled its readiness to step in to help the Sri Lanka in trouble. A row with Russia (a potential fuel supplier) over the legality of an Aeroflot flight ended in a diplomatic engagement, albeit belatedly. Apparently, it takes time for the Lankan bureaucracy to assimilate Prime Minister Ranil Wickremesinghe’s advice that it should treat the country’s traditional friends with respect and consideration.

Political stability

Painfully elusive political stability now seems within reach. It finally became clear to the main political actors, both on the side of power and the opposition, that without political stability, international financial assistance will not be available.

While President Gotabaya Rajapaksa has remained steadfast in his position that he would only step down if expelled by constitutional means and not under pressure from street agitators, the Aragalaya or The struggle to force him to quit has run out of steam. This allowed him to start functioning normally. But the “Go Gota Go” activists could take satisfaction from the fact that they ousted the other Rajapaksas, including Prime Minister Mahinda Rajapaksa.

Appointment of Wickremesinghe

The problems created by instability in Parliament and confusion in foreign relations were partially resolved by the appointment of Ranil Wickremseinghe as Prime Minister in place of Mahinda Rajapaksa. Although Wickremesinghe’s appointment was bitterly criticized for being the only member of his party in parliament, Wickremesinghe highlighted his good relations with the international community and donors.

The dispute in parliament over the content of the 21st Amendment (21A) aimed at reducing the powers of the executive president seems to end with the removal of one of the main obstacles. Basil Rajapaksa, a powerful member of the ruling Sri Lanka Podujana Peramuna Party (SLPP) and a dual citizen (US-Lanka), resigned on Thursday, abiding by a clause in Bill 21A which stated that dual citizens are not eligible to hold political office. . Once that issue is resolved and MPs agree to let the president retain the defense portfolio, 21A is expected to pass with the required two-thirds majority and without a referendum.

Given the informal agreement between President Gotabaya and Prime Minister Wickremesinghe to work harmoniously, the unfortunate history of Sri Lanka’s troubled diarchies will hopefully not be repeated. This will help the international community to trust the government of Lanka and accelerate its aid programs.

The likely appointment of leading entrepreneur Dhammika Perera to replace Basil Rajapaksa as the ruling SLPP MP will be welcomed by the business sector as well as the international community as he has released a detailed plan to improve Sri Lanka’s revenue. , sector by sector. . It could even be housed in cabinet in line with the president’s and prime minister’s penchant for involving subject matter experts in governance.

The Prime Minister held talks with IMF Managing Director Kristalina Georgieva to expedite the services-level agreement with Sri Lanka and extend the IMF facility by September. For its part, China said it is “ready to work with relevant countries and international financial institutions to continue to play a positive role in supporting Sri Lanka’s response to the current difficulties and efforts to alleviate debt burden and achieve sustainable development”.

Long way to go

While these developments are encouraging, Sri Lanka still has a long way to go before normalcy is restored. The prime minister has told parliament that Sri Lanka needs to find US$3.3 trillion for oil imports over the next six months. It would need US$250 million over the next six months to supply cooking gas. He warned that winding queues at petrol stations would continue for the next three weeks and called for fuel rationing through a coupon system.

Sri Lanka’s annual rice requirements are 2.5 million tonnes. But he only has 1.6 tons in stock. To overcome severe shortages in the coming months, Sri Lanka must import $150 million worth of rice each month. It would cost $600 million a year to import fertilizer. An improvement in the harvest situation is not expected until February 2023.

A recent study by the World Food Program (WFP) found that 73% of participating households had reduced their diet and food intake. Sri Lanka needs US$5 billion over the next six months to ensure daily life is not disrupted. Another billion US dollars is needed to strengthen the rupee. In total, the country needs 6 billion dollars, at least, for the next six months.

According to the Central Bank, average GDP growth in 2022 will be -3.5% but according to the International Monetary Fund, growth will be negative at 6.5%, partly due to the conflict in Ukraine. Recovery is only expected in 2024.

Sri Lanka’s foreign loans amount to $53 billion. Many loan installments received from multilateral institutions are due to be repaid this month. In fact, Sri Lanka has already defaulted and is seeking new repayment reschedulings.

Loss of income

The prime minister said the government lost LKR 6.6 billion ($18.3 million) in revenue with the abolition of a tax system introduced in 2019. Inflation rose with money printing . LKR 2.5 billion has been released into the economy from 2020 to May 20, 2022. There has been chronic mismanagement of finances by ministries. The government is unable to provide funds to cover the losses of any of the public enterprises.

Corrective actions

Regarding the proposed corrective measures, the Prime Minister said that with the help of the IMF, by 2024, Sri Lanka will have an economic recovery plan. By 2025, the budget could be balanced.

“We call on the International Monetary Fund to organize a conference to help unite our lending partners. The holding of such a conference under the leadership of India, China and Japan will be a great strength for our country. China and Japan have different credit approaches. We hope that consensus on lending approaches can be reached through such a conference,” the Prime Minister said.

Provisional budget

The interim budget will reduce unnecessary government spending, while controlling other costs, he said. On what is for the poor, Wickremesinghe said the annual expenditure to provide various reliefs to economically backward people will increase from $350 million to $550 million. Loans to farmers would be amortized at 100%. Loans obtained by farmers with less than two hectares of land will be stopped immediately.