Sri Lanka’s new leftist government, which won a landslide election earlier this month by promising to ease an austerity regime imposed by an IMF bailout, risks upsetting voters early into its term by following an unpopular debt repayment plan set by former president Ranil Wickremesinghe.
The National People’s Power (NPP), a coalition of left-wing parties, gained support amid frustration with Sri Lanka’s debilitating economic crisis and the spending cuts required by the US$2.9 billion International Monetary Fund (IMF) programme to bail out the country after it defaulted on its debt in 2022.
Years of deep financial crisis caused by a collapse of foreign currency reserves that drove the country into sovereign default has pushed many of Sri Lanka’s 22 million people to the brink with soaring costs for food, energy and medicine.
The IMF repayment terms, which included a cost recovery based on electricity pricing and a hike in VAT, drove up prices for everything from food to school supplies, ultimately leading to Wickremsinghe’s downfall.
In September, Anura Kumara Dissanayake became the country’s first leftist president, and went on to consolidate power as the NPP won a two-thirds majority in the snap general elections on November 14.
It promised to alleviate IMF austerity measures and create a stable, corruption-free social order.
Initially, the party spoke of renegotiating the terms of the IMF programme and even “revisiting” the Debt Sustainability Analysis (DSA) – a tool used by the IMF to examine a country’s ability to service debt and access its financing needs – to ease the burden on the people.
But, in a speech delivered at the inaugural parliament session of his newly established government on November 21, Dissanayake made an apparent U-turn, announcing that he would proceed with the existing IMF programme and a private creditor deal formulated by his predecessor.
“At this juncture, debating whether the proposed restructuring plan is good or bad, advantageous or disadvantageous, serves no purpose. This is the reality we are faced with,” Dissanayake said last week.
On Saturday, the IMF completed its third review of Sri Lanka, releasing roughly another US$333 million to the crisis-mired nation.
The NPP government agreed on Tuesday to allow the exchange of US$12.55 billion in international sovereign bonds for new securities.
Dissanayake explained the pivot by saying a prolonged renegotiation with the IMF programme would make it “impossible” to move the economy forward.
But experts warn aligning with previous plans by Wickremesinghe, who took over as the Rajapaksa dynasty was swept from power after two decades of ruinous stewardship of the economy, will pose immediate challenges, especially after lofty election promises.
“[Economic] growth will be undermined, relief to people will be undermined,” Ahilan Kadirgamar, a political economist from the University of Jaffna, told This Week in Asia.
The NPP gained power by offering a pro-poor alternative to a beleaguered Sri Lankan public, cutting across long-standing ethnic loyalties to win in Tamil areas in the north, a first for a non-Tamil party since the 30-year civil war between the Sinhalese and the Tamils.
It also achieved a two-thirds majority in November, a first for the country’s proportional representation system, despite holding only three seats after the 2020 election.
But the return of Donald Trump to the White House may bring renewed uncertainty to the global economy, Kadirgamar added, meaning Sri Lanka could find itself in a tricky position after 2027, when the country starts repaying its debt “without growth and with such a bad bond deal”.
Other analysts have urged the government to remain steadfast and negotiate for better repayment terms from the IMF.
“It is unfortunate that the deposed president Wickremesinghe has left the country with a debt agreement favouring creditors to the detriment of the nation’s economic sovereignty,” said Kanchana N Ruwanpura, a professor of development studies from the University of Gothenburg, Sweden, and co-founder of the Institute of Political Economy, Sri Lanka.
She says that deal has harmed Sri Lanka, noting that Ghana secured a 37 per cent reduction in loan repayments, while Sri Lanka received only a 27 per cent cut on debts to private creditors.
The NPP still has alternatives, she added, and it should “work hard” to highlight the regressive nature of the global financial architecture and its “paucity” in tackling the climate and debt crises.
In his initial economic plan, Dissanayake proposed strategies to stimulate growth and production, encouraging all citizens to participate in revitalising the economy – with seed labs to improve agricultural yields on Sri Lanka’s farms, and initiatives to boost tourism, IT education and entrepreneurship.
His shift in approach to the IMF has garnered support from financial markets, as the country seeks to move away from the threat of default.
On Thursday, Moody’s the rating agency said it would consider upgrading Sri Lanka’s sovereign credit rating.
This move reflects Dissanayake’s pragmatic approach, according to W. A. Wijewardena, a former deputy governor from the central bank of Sri Lanka.
“Pragmatism means that if Dissanayake does not go by the IMF programme now, the country would have been driven to a chaotic situation,” Wijewardena said.
He cautioned that it is still early in his presidency, and the public will closely watch whether promises for change are turned into actionable plans.
“We know that the vision statement made by a leader – unless it is converted to an implementable action plan – is only just mere words,” Wijewardena added.