Colombo is heaving a sigh of relief two years after the island’s economy crashed, compelling the government to declare bankruptcy and immediately suspend repayments on multilateral and bilateral loans. It was an economic horror story—and still is—despite bilateral creditors finally reaching an agreement on June 26 to restructure debt. Sri Lanka’s total debt stood at $92.43 billion in 2022, half of it to foreign creditors.
So, debt restructuring offers respite as the island economy struggles for recovery, and may pave the way for creditor nations to resume projects or invest anew. But the economic and socio-political woes are far from over.
Under the Memorandum of Understanding (MoU), Sri Lanka’s loan repayments stand postponed until 2028 and there is provision to settle some bilateral loans by 2043. This immediately reduces the crushing weight of multilateral debt, but all these extensions mean Sri Lanka continues to remain in the clutches of those it owes money to. Then there are the commercial loans that are up for renegotiation. In such a backdrop, there could be truly little to celebrate.
In 2022, economic mismanagement coupled with the pandemic’s devastating impact, particularly on the island’s tourism sector, resulted in Colombo’s economic distress. But this mismanagement includes decades of external borrowing as well as extensive commercial borrowings from China that enraged people, particularly due to the uncompromising stance adopted by Beijing after the economic collapse and the irresponsible vanity projects that added to the chaos.
There were no plans or necessary wisdom to address the debt crisis. Amid it all, angry Sri Lankans mounted public protests, eventually driving President Gotabaya Rajapaksa to resign the presidency and flee. Unlike the Rajapaksas, this is known turf for President Ranil Wickremesinghe, who has worked towards securing a bailout from the International Monetary Fund (IMF) as a first step, and then seeking to lock a restructuring deal with multilateral and bilateral creditors including the difficult-to-placate China.
But memories are short and rapidly fading. In 2022, the island ran out of forex, there was general chaos and Sri Lanka’s queues for food, cooking gas and fuel grabbed international headlines. The situation was made worse by a shortage of essential medical supplies and the island’s health sector, one of Asia’s best, stood paralysed.
After the IMF approved the Extended Fund Facility (EFF programme) for Sri Lanka in March 2022, the Official Creditors Committee (OCC) was launched to convene discussions with Sri Lanka’s bilateral creditors to finalise a plan for restructuring its debt, in which India played a significant role. The government has finally cobbled an agreement for $5.8 billion with its bilateral lenders, including China. In Beijing, Colombo found a Shylock demanding its pound of flesh.
But now, President Wickremesinghe has managed to extend the life of loan repayments. Opinion is divided on this economic relief formula. There is the simplistic notion that the IMF bailout and the debt restructuring will not work in favour of Sri Lanka as dents will be perpetuated and not repaid. While economists argue the pros and cons, from the people’s point of view, life needs to resume—but no longer at the cost of enslaving future generations to a massive debt burden. There is apprehension about having to seek an 18th round of assistance from the IMF and not being able to envision economic freedom through a homespun model that puts the island’s economic growth first, without being enslaved by creditor nations, including China and India.
An outcome of the debt crisis is people’s awakening to the entrapment of the global creditor consortia model. Acknowledging that Sri Lanka deserves to catch its breath as an immediate necessity to gallop towards economic recovery and growth, would require a divorce from the current model that perpetuates debt. To snap out of the current morass, it can no longer be business as usual for Sri Lanka. The island economy needs a rethink and reboot.
With the OCC finally signing a MoU on debt restructuring, its supporters hail it as a milestone in resetting the economy as it reflects creditor nations’ recognition of progress made to stabilise. But ask an average citizen, it will be a tale of woe about food and medicine being unaffordable. The white-collar middle class complain about the excessive weight of multiple taxes, a contributor to the mass exodus of professionals, particularly medical professionals.
Permanent migration and migration for employment is taking place at a time when the island needs its skilled human resources the most. In short, being tax-stabbed cannot be Sri Lanka’s response to economic management. Recovery needs much more than restructuring; it needs economic remodelling that factors in Sri Lanka’s strengths, exports, increased investments in high-end tourism as well as the healthcare and wellness industry. A formula that can help prevent a repeat of 2022 and doesn’t cause Sri Lanka to have an 18th round with the IMF.
Post restructuring agreement, Sri Lanka needs to acknowledge the failure of the old IMF formula. People are not willing to forgive its rulers for several decades of economic mishandling anymore. The 2022 economic collapse has served as an eye opener to happy islanders who are not only sceptical but unlikely to forgive the rulers for any more mistakes.
Sri Lanka’s story is a cautionary tale, with lessons for others on the brink of collapse like Pakistan or the Maldives. For its own good, Colombo must act with caution and wisdom, remembering that it is not possible to overcome the Chinese debt trap with an Indian one. There is much that is taking place in Sri Lanka in terms of investments that are hidden from the public eye. The future should necessarily be about an economic model that helps Sri Lanka break economic shackles, policies and programmes that can prevent brain drain, increasing exports and expanding what’s already serving the island.
When elections are announced, the economic model for recovery will be an important arbiter. Public trust in the ruling class and their economic programmes are at an all-time low. It will be critically important to make people stakeholders in the plans being made. Their resentment and lack of trust will guide the electoral outcomes, if not.
Dilrukshi Handunetti
Award-winning journalist and lawyer, founder and director of the Colombo-based Center for Investigative Reporting
(Views are personal)
(dilrukshi@cir.lk)
(dilrukshihandunnetti@gmail.com)