Sri Lanka caught in a cleft
Since the last three months, nationwide protests in Sri Lanka have escalated against the crippling shortages of essentials, double-digit food and fuel inflation and long power cuts, among other privations. The groundswell of discontent spilled over into a spiral of arson against the rule of the Rajapaksas with protestors storming the official residence of president Gotabaya Rajapaksa and setting fire to the private residence of prime minister Ranil Wickremesinghe. Earlier in May, Mahinda Rajapaksa resigned as premier and fled to the safety of a naval base in Trincomalee, a port city on the northeastern coast. The president and PM are expected to resign on Wednesday, paving the way for an all-party government to steer the nation out of its worst political-economic crisis since Independence in 1948. The big question is whether this will quell the popular anger against the Rajpakasas and the political class. Political uncertainty is the last thing the island nation of 22 million people needs if there is to be light at the end of a period of darkness.
A functioning government is required at the earliest for Sri Lanka to stem its economic woes through a bailout package with the International Monetary Fund. Sri Lanka hopes for a Rapid Finance Instrument facility as well as an Extended Fund Facility to overcome its balance of payments crisis, which has left it with usable foreign reserves of only $50 million to pay for fuel, food and other essentials. Not so long ago, it suspended international bond payments. With a $50 billion foreign debt, the island nation owes around $8 billion in debt repayments this year. A debt sustainability report for the IMF is expected to be finalised shortly.
The director of the World Food Programme is also likely to visit the nation this week—which is extremely important as international aid agencies have said that one-third of the population face hunger as food supplies have run out and living standards squeezed by consumer price inflation running at 54.6% in June. Given the gravity of the economic cr isis, a new government thus should be in office to engage with the IMF and WFP. Bilateral lenders will withhold further assistance pending the outcome of the IMF package. The World Bank has also stated that unless an adequate macroeconomic policy framework is in place, it does not plan to offer new financing to Sri Lanka.
As a neighbour, India is bound to be concerned by the turmoil in Sri Lanka. India has been generous in extending around $3.5 billion in economic assistance so far this year, including a $400-million RBI currency swap, $500-million loan deferment and lines of credit for importing fuel, food and medicines, which have already been used up. India has firmly stated that it will “always be guided by the best interests of the people of Sri Lanka expressed through democratic processes” and will do what it can to assist the country to overcome hardships. The best interest of the island nation indeed lies in the formation of a representative all-party government to address the economic crisis that impacts all of them. All bets are off if this also appears challenging due to the fragmented political opposition which does not have the numbers in Parliament. Then there is no alternative to early elections. Unfortunately, there are no quick fixes for Sri Lanka’s problems.