Sri Lanka’s rocky road to recovery

By Uditha Devapriya

Ever since his election through parliament on July 20, Ranil Wickremesinghe, Sri Lanka’s President, has been busy consolidating his power. Two days after his appointment, he directed the military to forcibly eject protesters occupying the Presidential Secretariat at Galle Face in Colombo, the site of anti-governmentdemonstrations since April. Through various legal and political maneuvers, Wickremesinghe disbanded the crowds: by August 13, the protesters had voluntarily vacated from the protest zone.

The road ahead will be tough. Sri Lanka’s challenges lie not just with its economy, but in its foreign relations as well. Largely because of the crisis, it has been forced to make choices, to shift to different allies, to seek assistance from every other corner. With one country and institution after another declaring that they will assist only after negotiations with the IMF conclude successfully, the ball remains in the government’s court.

So far, the biggest stumbling block in Sri Lanka’s negotiations with the IMF has been China’s reluctance to restructure its debts. As one of Sri Lanka’s largest creditors, Beijing stands to lose a lot in the process. Debt restructuring can, for instance, set off negotiations elsewhere in the region. If China offers relief to Sri Lanka, Pakistan and Bangladesh, both recipients of Chinese debt, might demand the same, resulting in a cascade which might not be in Beijing’s interests, particularly in light of growing tensions with Taiwan.

This is not to say that there hasn’t been progress. On September 1, the IMF announced that it had reached a staff-level agreement with the government, something that the Governor of the Central Bank, Dr Nandalal Weerasinghe, had announced two weeks earlier. To be sure, the agreement, which includes an Extended Fund Facility disbursement of USD 2.9 billion, is subject to approval from the IMF Executive Board, and depends on negotiations with creditors. Yet as Opposition MP Patali Champika Ranawaka pointed out on Twitter, it marks “the successful completion of the first concrete step in the process.”

There are also signs that Beijing is wavering. On September 2, one day after the staff-level agreement was announced, the Chinese Embassy in Colombo reiterated its support for the island, declaring that Chinese financial institutions had “reached out to the Sri Lankan side” after the government announced its default in April. As one of its stakeholders, Beijing isn’t exactly cut off from the IMF. It is not a part of the Paris Club, but nor for that matter is India, which is presently playing a prominent, if thankless, part in Sri Lanka’s recovery. And yet, with the unravelling of a number of Belt and Road Initiative (BRI) projects across Africa and Asia, and the withdrawal of several member states from the 17+1 initiative in Europe, China is hardly in a mood for a total restructuring of Colombo’s debts.

Maintaining political stability while overseeing IMF negotiations will be Sri Lanka’s biggest challenge. The country is still headed by the Sri Lanka Podujana Peramuna (SLPP), which is associated with the Rajapaksas, the family dynasty that has been dominating politics here for 17 years. The SLPP is widely seen as corrupt, inefficient, and ineffective. It has not been able to appease protesters. To save face, it extended support for Ranil Wickremesinghe in his bid for the presidency. Owing to this, Wickremesinghe is seen as lacking a mandate. How he handles these dilemmas will be crucial to his very survival.

The protests that erupted in March showed that Sri Lankans were capable of organizing a mass resistance movement. In response, the then government resorted to strategies like social media bans and curfews. Since assuming office, Wickremesinghe has shifted gears, addressing the country’s more acute problems, like fuel shortages. The Power and Energy Ministry, to give one example, has opted for a digital solution: a QR code based Fuel Pass. The system has worked so far, cutting the island’s monthly fuel bill by half while reducing or eliminating the queues that had become a way of life at filling stations.

Despite this, though, the government will find it difficult to implement IMF reforms. It has increased electricity tariffs by an average of 75%. More hikes could follow. State-owned enterprises will probably be restructured: the Energy Minister has admitted that the public sector is overstaffed, pointing to the need for a complete overhaul of the bureaucracy. This will in all probability lead to unemployment and mounting inflation.

Welcomed by Colombo’s ubiquitous neoliberal free market circuits, such measures have been vehemently criticized by sections of the working class, peasantry, and even middle-classes. Middle-class opposition to neoliberal austerity is nothing new, but what is intriguing is that only a few months ago, many protesters from this milieu were taking the government to task for not engaging with the IMF. With the slow and painful hardships they have had to endure since the regime heeded their call, they have changed their tune. This has opened up opportunities for the New Left, led by the JVP and the FSP, to capitalize on their anger at austerity measures, even if such opposition is couched more in the rhetoric of resistance to political corruption, rather than to the IMF imposed reforms themselves.

The electricity tariff hikes have been bitterly opposed. Such measures have thrown up their own bundle of contradictions. The SLPP, and the Rajapaksas, have for long been identified with the Buddhist clergy. It was this clergy that helped prop up Gotabaya Rajapaksa at the 2019 elections. Yet with mounting inflation and public utility tariff revisions, even sections of this clergy have wavered in their support. The latest development in this regard has been a series of protests led by monks, against the 500-plus percent electricity rate hike imposed by the government. In response to the protests, the Energy Minister, Kanchana Wijesekera, has declared that Buddhist monks will not be given favorable treatment, implying that if temples do not pay on time, power will be disconnected. This marks a significant rupture with an institution widely seen as a pillar of support within the government.

The government’s strategy has been two-pronged. While ordering arrests of activists and protesters, it has also been co-opting sections of the Opposition, even those which refused to accept Ministries earlier. It has appointed critics of the regime as officials and heads of committees. Through such gestures, Wickremesinghe has both promoted the need for an all-party government and sleekly legitimized his presidency, an ambitious undertaking at a time when his much-reviled predecessor has returned to the country.

Whether these strategies will work in the long run remains to be seen. Seen as pragmatic by his supporters and authoritarian by his critics, Wickremesinghe has, thus far, avoided the fallout which befell the Rajapaksas. He depends for his survival on the support of the ruling party, the SLPP. The SLPP, conversely, depends for its survival on him. This is a marriage of convenience, and it has not deteriorated so far, even though a section of the SLPP distanced itself from the alliance early on and now sits in the Opposition. The consensus is that as long as this marriage lasts, the President can and will tighten his grip.

Undergirding these issues have been Sri Lanka’s complicated foreign relations. China has not only been ambivalent on IMF negotiations, but has also authored statements targeting some of the key negotiating partners, including the US. A recent communique, written by Beijing’s Ambassador to Colombo and published in a leading newspaper, criticized India’s and the West’s attempts at “colonizing” Sri Lanka. In response, the Indian High Commission accused the Ambassador of violating diplomatic etiquette.

An array of domestic and external factors will thus complicate Sri Lanka’s negotiations with the IMF. The country cannot avoid the contestations which are sure to accompany these negotiations. This includes China’s ambivalence regarding debt restructuring. To be sure, the region’s dynamics have changed considerably from what they used to be. The crisis in Sri Lanka has contributed to these shifts. It will have to be mindful of such developments if it is to recover. For that, it will need the support of no less than the world. Uditha Devapriya is the Chief International Relations Analyst at Factum, an Asia-focused thinktank on international relations, tech cooperation, and strategic communications that can be accessed at www.factum.lk. He can be reached at udakdev1@gmail.com.