Eighteen months ago, a new president and government came to power in Sri Lanka. Sri Lanka has had a national-unity government since August 2015. So what has changed?
The political atmosphere is freer, ethnic tensions are much lower, and foreign policy has been rebalanced, with much better relations with India and the West. However, the government’s Achilles heel is the economy. Here expectations have been dashed. What has gone wrong?
Sri Lanka’s balance of payments is in dire straits. The country’s mounting foreign and domestic public debt, a huge fiscal deficit and a severe foreign exchange shortfall have led to potentially calamitous economic circumstances. Sri Lanka has not yet secured the means to meet its upcoming foreign loan repayments — US$4.5 billion is due over the next year, to be followed by another US$4 billion in the subsequent year.
Sri Lanka’s former pro-Chinese ‘strongman’ President Mahinda Rajapaksa was voted out of office in January 2015. The new administration, led by President Maithripala Sirisena, is committed to more ‘balanced’ major power relations.
Last year, soon after taking power as president of Sri Lanka, Maithripala Sirisena requested a US$4 billion loan from the IMF to restructure its debt repayments. The bailout package was rejected by the IMF. It warned the government instead to rationalise the tax system and arrest growing inflation.
The Sri Lankan economy appears to exist in a system that can evolve only through crisis. Optimistic policymakers, predicting that the country’s economic trajectory would self-correct, received a collective wake-up call in February with a sovereign rating downgrade by Fitch, even as the country made a formal approach to the IMF for a bailout package.
Tough economic issues are getting harder to ignore for Sri Lanka’s new political leaders. Sri Lanka witnessed a change of government in early 2015 with the surprise defeat of the political strongman and war-winning president Mahinda Rajapaksa.
The direction of Sri Lanka’s post-civil war socio-political and economic development took a pivotal turn in 2015 with the election of a new president in January and, seven months later, a new government to parliament.
It is no exaggeration to say that 2015 will be remembered as a major turning point for Sri Lanka as a nation. The Sri Lankan people made a decisive choice towards democracy and good governance, towards communal reconciliation and for moving the country back towards its traditional foreign policy orbit. It was a reassertion of the values that could make Sri Lanka the success story of South Asia.
Former president Mahinda Rajapaksa’s failed bid to return to power as Sri Lanka’s prime minister is seen by many as a major blow for Beijing’s growing influence in the country and the region. The outcome of August’s parliamentary elections, which followed Rajapaksa’s ouster in January, seems to signal a return to Sri Lanka’s more traditional foreign policy orbit: balancing India’s security sensitivities with its pursuit of other relationships, including with China.
Few know much about Sri Lanka beyond its prominent location on the map off the southeast coast of India. However, it may be time for more investors to take notice of this small, developing nation. In the first quarter of 2015, the Sri Lankan economy grew by 6.4 percent. This matches Q4 2014. Sector by sector, the economy has a few notable standouts, as well, with manufacturing up 6.5 percent and services up by 7.5 percent.
