Colombo’s new administration will soon complete six months in office. Predictably, it has not been a bed of roses. The government has tried to introduce changes, particularly to the entrenched political culture, streamline systems and reduce excessive spending. Nevertheless, the challenges remain daunting.
The left-leaning government presented its first budget on February 17, striking a tricky balance that meets the International Monetary Fund (IMF) requirements while seeking to push a home-spun approach to solving the island’s long-standing economic woes. On February 19, Fitch Ratings recognised the island’s budget reflected the authorities’ commitment to raising fiscal revenues as a share of its GDP—an approach that, if proven successful, may alleviate a long-standing weakness in the credit profile. While acknowledging risks to the fiscal outlook with the slow pace of fiscal consolidation weighing on prospects for debt reduction over the medium term, Fitch also noted the budget offered greater clarity over the administration’s medium-term fiscal and economic reform agenda and consistency.
The government aims to increase revenue to 15.1 percent in 2025, from 11.4 percent in 2023, exceeding Fitch’s assumption that the 15 percent threshold would be achievable only by 2026. The budget incorporates a 36.5 percent increase in revenue from taxes on external trade and a 13.1 percent from income taxes. While these revenue-based targets demonstrate its commitment to the IMF programme and gradual economic recovery, challenges remain before the fragile economy.
In the lead-up to the budget presentation, the general mood was both sceptical and sombre rather than hopeful, a silent acknowledgement of the absence of space to wriggle within the controlled fiscal climate with the IMF conditions posing an additional stranglehold. The administration lacked the space to develop its economic formula or to deliver on one of its key pre-election pledges: to renegotiate the IMF-backed debt restructuring programme achieved during President Ranil Wickremesinghe’s presidency to offer a level of relief to the poor and middle classes. The administration is unable to withdraw from the deal without causing significant economic consequences that could be more severe than those experienced in 2022.
In its wake, following the third review on February 28, the IMF approved $2.9 billion as part of the bailout to help the island’s economic rebound. Nevertheless, the IMF-brokered deal remains anathema for most people, and a sense of disappointment prevails despite accepting the economic constraints as the collective reality.
As the euphoria of electing a new administration and a trusted presidency begins to wane with time, the government is entering a period of renewed scrutiny—which will intensify and find people’s expression during the local authorities’ elections in the coming months. Insiders claim the new dispensation is working with intent towards course correction, but the people reeling under tremendous economic pressures crave urgent measures to reduce their woes, which may not be possible in the medium term.
The people, meanwhile, are getting impatient as they struggle to make ends meet amid spiralling costs of living. Government insiders, however, call for patience, claiming the administration is formulating policies to strengthen programmes while trying to introduce a new political culture to increase public institutions’ efficiency.
The government is cognisant of the political reality that catapulted them into office: economic and political bankruptcy. In the run-up to the crucial presidential and parliamentary elections, the National Peoples’ Power (NPP) drummed up public support by effectively driving the point that the island’s economic collapse was more about corruption and nepotism than systems. This also means the administration must now cater to public expectations around accountability, including acting against corrupt elements in previous administrations and going beyond a couple of indictments of Rajapaksa family members. Difficult as it may be, it is time for tangible changes to political structures.
However, the introduction of such changes may not be easy. For example, the promulgation of a new Constitution will require time. The public has continued to harbour hopes of having the executive presidency dismantled, but since 1996, despite vocal pledges to abolish it, each president has embraced the powerful executive presidency and has not desired to prune the excessive powers, let alone abolish it. It would also require dealing with the island’s powerful Buddhist clergy and the military, wielding immense power over the Sri Lankan community.
To bring a political equation among ethnicities, the government will have to address war excesses, which may necessitate action against security personnel hailed in the South as war heroes. Another perspective would be to consider the political issues of the ethnic Tamils, who largely supported Dissanayake’s NPP with the expectation of a new beginning, free from the influence of long-standing power politics that overlooked Tamil political goals. The severely constrained government may have continued with the IMF programme to ensure stability, but political reforms of inclusion and justice cannot be postponed if the administration Is serious about structural reforms.
This also brings up the NPP’s equation with neighbouring India, a critical player in geopolitics. Dissanayake’s party has historically remained critical of what was termed “Indian expansionism”. The incumbency has resisted calls to investigate military exercises during the protracted war in the North of Sri Lanka. Dissanayake grabbed headlines last month by pushing the cancellation of a 450 MW wind power project by the powerful Adani Group due to tariff and environmental concerns.
Many Sri Lankans are apprehensive about Indian investments, seeing them often as extensions of India’s geostrategic interests while undermining Sri Lanka’s sovereignty. India and Sri Lanka cannot afford an estranged relationship while following their growth trajectories and strategic interests. This calls for both Delhi and Colombo to address the underlying trust deficit.
(Views are personal)
(dilrukshi@cir.lk)
(dilrukshihandunnetti@gmail.com)
Dilrukshi Handunnetti | Award-winning journalist and lawyer; founder and director of the Colombo-based Center for Investigative Reporting (CIR)