By Prof.Neil DeVotta
The Sri Lankan economy stabilised in 2023, with assisted recovery measures including an Extended Fund Facility Program with the International Monetary Fund and loans from the Asian Development Bank and the World Bank. Yet political uncertainties loom as President Ranil Wickremesinghe could potentially delay elections amid the rising popularity of opposition political players, such as the Janatha Vimukthi Peramuna party and the Samagi Jana Balawegaya alliance.
If 2022 ranked as Sri Lanka’s worst-ever economic year, 2023 was relatively stable. The government, headed by President Ranil Wickremesinghe, negotiated with creditors and secured an Extended Fund Facility (EFF) program with the International Monetary Fund (IMF).
The EFF program made available US$670 million as part of a four-year US$3 billion loan. The Asian Development Bank loaned US$200 million in December 2023 and the World Bank released an additional US$250 million.
Following six quarters of negative growth, the economy grew by 1.6 percent in the third quarter of 2023. Inflation was at 3.4 percent in November 2023, compared to 73.7 percent in September 2022. Increased tourism and remittances raised foreign reserves to around US$5 billion. GDP growth, which was -7.8 percent in 2022 and -3.0 percent in 2023, is projected to grow to 1.7 percent in 2024.
While per capita income stood at US$4388 in 2017, projections indicate a decrease to US$3280 in 2023. The poverty rate has gone from 12 percent to over 25 percent. By December 2023, over 60 percent of households experienced an income decline, 91 percent saw expenditures rise, 22 percent fell into debt and nearly 55 percent of students aged 3–21 faced adverse effects on their education.
To increase revenue — a major condition associated with IMF assistance — the value-added tax was raised from 15 percent to 18 percent starting in 2024. The government aims to offset the impact by reducing other taxes.
Preliminary debt restructuring agreements have been reached with China, India, and Paris Club members. The government hopes to secure similar terms from commercial creditors, who account for nearly 40 percent of the total foreign debt.
The presidential election must be held between September and October 2024 and parliamentary elections before August 2025. Wickremesinghe could refuse to contest as he did in 2015 and 2020. But the more likely scenario is that he will hold presidential elections first since dissolving parliament early will upset legislators who must serve a minimum of five years to qualify for pensions.
Some fear the cavalierly authoritarian Wickremesinghe may postpone both elections just as he canceled local council elections in March 2023. The local elections were canceled due to an apparent lack of funds, despite the Supreme Court instructing they be held.
The National People’s Power (NPP) alliance, led by the Marxist party Janatha Vimukthi Peramuna (JVP), was slated to perform best in the local government polls. The JVP looks positioned to dominate parliamentary elections and its leader, Anura Kumara Dissanayake, could pose a serious threat to Wickremesinghe in the presidential election. The NPP is opposed to privatizing even loss-making state-owned enterprises and its ideology and policies clash with ongoing reforms.
The JVP has moved away from its insurrectionary past, but the business community, upper middle class, and leading civil society groups in Colombo remain wary of it. Its opponents complain that the NPP is heavily funded by China, which they claim seeks to undermine the IMF program and restructure Chinese loans on more favorable terms. JVP allies claim India and the West do not want the party gaining power.
The JVP is the only party untainted with corruption and its promise to hold corrupt officials accountable resonates with the public. This contrasts with the president’s United National Party (UNP), which perpetrated a massive bond scandal that contributed to the island’s debt when Wickremesinghe was prime minister between 2015 and 2019. Since becoming president, Wickremesinghe has also had to tolerate corrupt cabinet officials to maintain the Rajapaksa-led Sri Lanka Podujana Peramuna (SLPP) party’s support.
The Samagi Jana Balawegaya is another political alliance that is positioned to feature prominently when polls are held. Despite a similar economic recovery plan to the government, its leader Sajith Premadasa is more popular than Wickremesinghe.
Wickremesinghe’s presidential campaign will point to the relative stability he has brought about. The Governor of the Central Bank has stated that any deviation from the present trajectory will undermine economic reforms and force Sri Lanka to cough up US$6 billion annually to cover debt arrears.
The government claims that its policies are building confidence within the international community. This narrative was boosted when India’s Adani Group and the US Development Finance Corporation announced they will invest US$700 million and US$553 million respectively in a Colombo Port terminal. China’s Sinopec Group also pledged to invest US$4.5 billion in an oil refinery in the Hambantota Port.
Historically, UNP candidates have depended on minority support to win elections. But Wickremesinghe has alienated the Catholic community by refusing to be forthright about the 2019 Easter Sunday bombings and disappointed the Tamil community.
The parliamentary elections are unlikely to result in a single-party majority. The presidential poll may see no candidate win a majority in the first round, making voters’ second and third preferences crucial to an election that will determine the island’s socio-economic fortunes for years to come.
(Neil DeVotta is Professor of Politics and International Affairs at Wake Forest University)
This article is part of an EAF special feature series on 2023 in review and the year ahead.
It is unclear who the SLPP will pick as its candidate. It will not be anyone from the discredited Rajapaksa family. The party leadership could settle on Wickremesinghe, knowing that he will continue to protect them against numerous credible allegations. The Supreme Court’s ruling declared the Rajapaksa brothers and their allies responsible for the country’s bankruptcy which will force many in the SLPP to look elsewhere.