Sri Lanka has voted. However, high debt service payments and strict IMF conditions severely restrict the newly elected president’s scope for political action – with serious social consequences and the risk of undermining the population’s trust in democracy.
Elections After Two Years Of Interim Government
More than two years after the major protests of spring 2022, Sri Lanka finally held its first elections on September 21, 2024.
Despite then-President Gotabaya Rajapaksa‘s flight in response to the protests, no elections had been held until that point. Instead, an interim government was formed in 2022 under Ranil Wickremesinghe, a member of the Mont Pèlerin Society. The interim government was seen by many Sri Lankans as lacking legitimacy. Wickremesinghe suspended local elections on dubious grounds and suppressed civil protests harshly.
Wickremesinghe also sought to delay the presidential elections further, which was however prevented by the intervention of the Sri Lankan Constitutional Court.
Unsurprisingly, Wickremesinghe was voted out of office in the election at the end of September 2024. The left-wing candidate Anura Kumara Dissanayake won with over 40 percent of the first-preference votes. Dissanayake, leader of the Marxist-communist party Janatha Vimukthi Peramuna (JVP), ran as the haed of a broad alliance that included 20 other organizations, such as other political parties, youth and women’s groups, and trade unions.
Capital wins
Dissanayakes’ electoral alliance had campaigned on the basis of implementing an economic policy in the interests of low-income earners and renegotiating Sri Lanka’s loan program with the IMF and its debt restructuring process. However, less than two weeks into office, Dissanayakes’ government backtracked on these promises and announced that it would respect the deal with the IMF and would not seek to renegotiate the debt restructuring. Rather, the government wants to conclude the unfinished negotiations with the bondholders in the same way as the interim government did shortly before it resigned. A clear victory for international bondholders, who will make profits of an estimated 3.6 billion US dollars even after the restructuring.
Limited Scope For Political Action
However, achieving a noticeable improvement in the day-to-day living situation is now likely to be very difficult for Dissanayake, as the country’s high debt service severely restricts the scope for political action. Interestingly, this view is also shared by the Friedrich Naumann Foundation:
“Even though Dissanayake comes from a left-wing background, he has to face economic reality as well. (…) Fiscal reality will immediately set limits to AKD’s [= Anura Kumara Dissanayake] agenda. Sri Lanka remains under the watchful eye of international creditors and any deviation from agreed economic policies could have serious consequences.”
(own translation and emphasis)
However, it is of course not inevitable economic and fiscal “realities” that restrict Sri Lanka’s ability to act. Rather, the circumstances are based on political decisions that were clearly made in favor of the creditors in the context of debt restructuring.
If the debt restructuring is concluded as it has been initiated by the interim government as part of the IMF program, Sri Lanka will still have to spend around 26% of its government revenue on foreign debt service in the next few years. Even after the restructuring, Sri Lanka will remain among the 20 percent of countries in its income category that spend the most of their national income on debt service payments to foreign creditors. In comparison: under the debt relief initiatives of the 1990s (HIPC), repayments were limited to a maximum of 15 percent of government revenue, as anything above that was considered unsustainable. Even more conservative actors close to the IMF agree that in the case of Sri Lanka, the debt relief envisaged in the IMF program is too low and that the debt service payments jeopardize a sustainable economic recovery (see here and here, among others).
In addition, the IMF program further restricts fiscal leeway by requiring the government to achieve a primary surplus of 2.3 percent of gross domestic product. This target is by no means based on a solid empirical foundation. On the contrary, everything indicates that this requirement is counterproductive from an economic perspective.
These austerity conditions and downplaying of the need for debt cancellation in the program – rather than inherent “realities” – limit Dissanayake’s ability to invest in education, social services and health. Given these obvious weaknesses in the IMF program and the devastating social situation in Sri Lanka – the poverty rate has just worsened for the fourth year in a row – Dissanayake’s call to renegotiate the program was a reasonable one that the German government and its partner countries should have supported.
Moderate Positions
This is not least because Dissanayake – contrary to what is sometimes communicated in the international media and to what the party history of the JVP might suggest – does not represent any particularly radical, Marxist positions. In his election campaign speeches, Dissanayake affirmed that he would ensure the repayment of IMF funds in any case and emphasized that he was keen to maintain good relations with his Western and Eastern partners. There was no talk of canceling the IMF program, but merely of its renegotiation. Dissanayake was therefore committed to the “rules of the game” – primarily set by the West – and was merely trying to negotiate a fairer outcome within these conditions. Western governments and international financial institutions should have taken up this offer.
Democracy at risk
Government officials in Washington and Berlin – as well as in Beijing and New Delhi – thus bear some of the responsibility for Dissanayake’s limited fiscal leeway. If the democratically elected president is unable to fulfill his election promises as a result, his approval rating is likely to fall.
It is hardly surprising that it is in the interest of Western governments to reduce the popularity of a “Marxist” president. However, trust in democratic structures themselves threatens to erode if citizens once again experience that it makes no difference who they vote for. A worsening social situation also fuels anti-Western sentiment, as this is – justifiably – blamed on the Western-dominated international financial institutions, particularly the IMF.
In Part II of the blog series, we take a closer look at the role the ongoing lawsuit with the Hamilton Reserve Bank may have played in this context.
This publication was co-funded by the European Union. Its contents are the sole responsibility of erlassjahr.de and do not necessarily reflect the views of the European Union.
