First election to be held after the declaration of bankruptcy in April 2022.
By P.K.Balachandran
Colombo, September 11: The Sri Lankan Presidential election which is to be held on September 21, will the first election of any kind after the economic crisis of 2022 which had resulted in Sri Lanka declaring itself bankrupt and seeking an IMF bailout.
The Ranil Wickremesinghe government had indefinitely postponed the long-overdue Provincial and Local Body elections citing bankruptcy. But the Sri Lankan constitution forced it go the Presidential election as per the scheduled date.
Despite financial inflows from the IMF, bilateral donors and international financial institutions since 2022, the economic situation in Sri Lanka is still dire with high prices and stagnant incomes.
Therefore, bread and butter issues are at the core of the Presidential election.
Wickremesinghe, who is standing as an “Independent” is highlighting the way he led Sri Lanka’s recovery from the depths of despair. Recovery is evident in the availability of goods and services, albeit at high prices.
But his two principal rivals, Sajith Premadasa of the Samagi Jana Balawegaya (SJB) and Anura Kumara Dissanayake of the National Peoples’ Power (NPP) are stoutly challenging his claims, highlighting the common man’s inability to bear a situation in which he has to pay high prices and high taxes without an increase in his earnings.
The fact is that, at the ground level, the economy is still sluggish and opportunities to increase incomes are still poor.
Economic Crisis
In 2022, Sri Lankans experienced unprecedented power cuts and shortages of essential commodities such as food and fuel. Inflation hit 50%. Protests broke out in April as serpentine queues formed at cooking gas and petrol stations. Schools shut and office goers were asked to work from home.
Sri Lanka imported US$ 3 billion more than it exported, thereby running out of foreign exchange. In 2019, it had US$ 7.6 billion in forex reserves, which dwindled to US$ 250 million. Mismanagement and bad policies added to difficulties created by COVID.
In April 2022, for the first time in Sri Lankan history, the then government led by President Gotabaya Rajapaksa, decided to default on repayment of foreign loans which totalled more than US$ 83 billion.
Following massive protests, Gotabaya Rajapaksa fled and resigned from exile in July. Acting President Ranil Wickremesinghe was elected President by parliament. Using Emergency provisions, Wickremesinghe restored order and began reviving the moribund economy.
Recovery
Rushing to Sri Lanka’s aid, India, US, China and the Paris Club collaborated to see that the IMF sanctioned a bailout of US$ 3 billion.
The World Bank pledged another US$ 600 million. India pumped in US$ 4.5 billon as credit to restore supplies of essentials.
In 2023, as part of the IMF reform program, Sri Lanka introduced income taxes for higher earners, ranging from 12.5% to 36%. It also raised other taxes to pay for critical purchases.
On the positive side, inflation dropped to about 5.9% from 70% in 2022. The economy expanded in the fourth quarter of 2023 by 4.5%. Interest rates also dropped, the rupee rebounded, foreign reserves increased.
Creditor countries such as India, Japan and France, agreed to defer debt repayments until 2028, giving Sri Lanka space to rebuild its economy.
Wickremesinghe brought down power tariffs by 22.5% which should lead to a reduction in the prices of goods by 20%.
Downside
The downside is that people, especially in the urban areas, are still complaining about high prices and taxes.
In an article dated September 13, 2023 published by Project Syndicate, Professors Jayati Ghosh and Kanchana N. Ruwanpura pointed out that the IMF had pledged only US$ 3 billion over four years.
It is a “tiny fraction of what the country needs to meet its debt-servicing requirements and just one-sixth of its foreign-exchange earnings, which amounted to roughly US$18 billion in 2022,” the economists pointed out.
The IMF imposed a series of conditions that significantly exacerbated Sri Lanka’s cost-of-living crises, the authors added.
The shift to market exchange rates led to a sharp currency devaluation, causing imported fuel and food prices to skyrocket and contributed to a 165% increase in electricity tariffs between June 2022 and February 2023.
“As fiscal restraints were imposed, the economy continued to spiral down, with GDP shrinking by 7.8% in 2022 and 11.5% in the first quarter of 2023. This has had an adverse impact on employment, livelihoods, and the viability of small and medium-size enterprises.”
“Consequently, real wages fell by 30-50% in 2022 and have remained stagnant,” the authors said.
Although there was a modest increase in corporate income taxes, wealth tax was avoided. Leftists complain that Wickremesinghe has let the wealthy off the hook while squeezing the poor.
Value-Added Tax, which applies to all, was raised to 18%. Thus, the bulk of additional revenues were generated through indirect taxes that disproportionately affected ordinary people.
Government reduced the interest rates on sovereign bonds held by Sri Lanka’s largest pension funds (Employees Provident Fund) from more than 20% to 12%, and then to 9% from 2025 until maturity.
Economist Ahilan Kadirgamar has said that this will result in a 30% decline in the value of retirement funds a decade from now.
The Employees Provident Fund is often the only financial asset of the working class. But this too will be subject to a 30% tax on their returns – higher than the tax rate applied to the corporate sector.
Rural-Urban Divide
However, there could be a rural-urban differential. Rural folk have reasons to be happy with Wickremesinghe’s government.
The import of diesel and petrol with the US$ 4.5 billion given by India and the dollars from the IMF and the removal of the ban on chemical fertilizers were a boon to the farmers.
Moreover, rural folk do not feel the pinch of high prices as much as the urbanites do, because they do not buy food with cash as urban workers and office goers to do on a daily basis. Nor do they use public or private transport on a daily basis.
Premadasa and Dissanayake
Wickremesinghe’s challengers, Sajith Premadasa and Anura Kumara Dissanayaka, have said that they will renegotiate parts of the IMF deal to benefit the poor.
But Wickremesinghe has warned that any bid to amend the IMF deal could adversely affect ties with India, China and the Paris Club of creditors, the US, and international lending agencies.
And more frighteningly, the horrible shortages might return.
Experience vs Inexperience
The Presidential election is also a contest between administrative experience and inexperience. In contrast to Wickremesinghe, both Premadasa and Dissanayake lack political and administrative experience.
Wickremesinghe has been Prime Minister five times and has held all important portfolios including Finance. So far, Premadasa has only held the portfolio of Housing which is a minor ministry in Sri Lanka. Dissanayake has no administrative experience whatsoever. As a Leftist, he has been an agitator and an MP all his political life.
As a non-doctrinaire and right wing politicians, Wickremesinghe and Premadasa will be amenable to the US and the West. But Dissanayake is a Marxist and ideologically anti-West and pro-China. He is a Sri Lankan “nationalist” who will fight perceived encroachments by external powers.
Dissanayake has been anti-India right through. While releasing his manifesto, he spoke about how Sri Lanka’s consumer goods market is dominated by Indian products and how it is necessary end it. He followed this up by saying that the giant oil tanks at Trincomallee given to India by a bilateral agreement in the 1980s will be given to a consortium of foreign entities through a tender.
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