On September 21, National People’s Power (NPP) leader Anura Kumara Dissanayake won Sri Lanka’s eighth presidential election. Two days after being sworn in as the president, Dissanayake dissolved the Parliament and declared that a parliamentary election would be held in November 2024.
It is no secret that Dissanayake’s victory comes amidst the worst economic crisis Sri Lanka has encountered since independence, as well as the significant decline in popularity of other leaders alongside the crisis. The resignation of Gotabaya Rajapaksa from the presidency and the appointment of Ranil Wickremesinghe to that post in 2022 broke the Rajapaksa-led Sri Lanka Podujana Peramuna (SLPP) into two major factions. One faction continued supporting the Rajapaksas, and the other sided with Wickremesinghe. Another major political party, Samagi Jana Balawegaya (SJB), also experienced a decline in popularity as the public was frustrated with establishment politics.
Against that backdrop, Dissanayake and his NPP coalition gained support as a viable alternative to rule the country and eliminate corruption. As a result, Dissanayake secured 42 percent of the valid votes cast in 2024, compared to the 3 percent he obtained in the presidential election in 2019. Although 42 percent support was not sufficient for him to secure the presidency in the first round, his lead of 1.2 million votes over major contender Sajith Premadasa ensured his victory in the second round.
Of all the major candidates, Dissanayake was often seen as the one with the least corruption allegations and his party, the NPP, played very well into the narratives of eradicating bribery and corruption. They insist that their party will make governance much more transparent and take steps toward eradicating corruption. The NPP has pledged to establish a new political culture in which they will attempt to eliminate rent-seeking behavior. While similar promises were made by other candidates, those were not very appealing largely because they were made by politicians, who were allegedly involved in corruption, bribery, and rent-seeking.
Economic Crisis and Economic Challenges
Dissanayake has been a popular leader for more than a decade, but it was Sri Lanka’s sovereign default, economic crisis, and austerity measures that allowed him to rise to the top political post in the country. The same economic crisis that brought him to power now poses his major challenge.
Although Sri Lanka is in the stage of economic recovery, the country has yet to finalize external debt restructuring and is still in a sovereign default. While significant progress was made in debt restructuring during the previous Wickremesinghe administration, external debt restructuring is not formally concluded yet.
A day before the election, the London Stock Exchange announced that an Agreement In Principle (AIP) was reached between Sri Lanka’s International bondholders and the Sri Lankan government to restructure International Sovereign Bonds (ISBs) issued by Sri Lanka. Parallel to this, the China Development Bank (CDB), which is in the category of commercial creditors alongside bondholders, had also agreed to restructure Sri Lankan debt. Previously, bilateral creditors had already agreed with Sri Lanka to restructure their debt in line with the parameters of the International Monetary Fund (IMF). That includes China Exim Bank, the bilateral lender of China.
After Dissanayake’s election, there were doubts as to whether the new president would proceed with the debt restructuring terms agreed under his predecessor’s administration, particularly given the criticism from the NPP on the amount of debt relief secured. Despite the campaign rhetoric, Dissanayake moved ahead with the previously agreed debt restructuring terms.
On October 4, Sri Lanka’s Finance Ministry announced that Citi Group has been selected as the deal manager to issue new bonds, confirming the finalization of debt restructuring with bondholders. Parallel to this announcement, the Finance Ministry confirmed that debt restructuring terms agreed with the bondholders are in line with the parameters of the IMF program. The Official Creditor Committee (OCC), which represents the bilateral creditors, had also confirmed that the AIP with bondholders is in line with Comparability of Treatment (CoT), indicating their approval of the deal. These announcements were made soon after a visit of an IMF delegation to Colombo. A statement issued after the delegation’s visit declared the IMF to be “encouraged by the [Sri Lankan] authorities’ commitment to continue the reform efforts.”
While the IMF does not conduct debt restructuring negotiations, the IMF program and debt restructuring go hand in hand. Continuation of the IMF program is contingent upon the finalization of debt restructuring negotiations, as it is the debt restructuring that determines the amount of debt relief Sri Lanka receives from creditors. Failure to conclude debt restructuring negotiations would therefore create uncertainties about receiving debt relief and the amount of relief, which in turn becomes a stumbling block for Sri Lanka to make the country’s public debt sustainable.
Therefore, as of now, the biggest challenge for Dissanayake and his team is to ensure the continuation of the IMF program and the conclusion of debt restructuring. Failure to continue either of those would result in serious repercussions to the economy, which in turn would have significant adverse impact on his popularity and the potential of forming a government in November. Dissanayake’s actions thus far imply an acknowledgment of the need to be politically pragmatic.
Domestic Politics and the IMF
Although this is the economic and operational reality, politics operates differently. During their election campaign, the NPP had proposed changes to the IMF program. In fact, their manifesto pledged to carry out an alternative Debt Sustainability Analysis (DSA) that would provide more debt relief to Sri Lanka.
However, the NPP has also been cautious in terms of its remarks and promises pertaining to the IMF program. Throughout their campaign, even among criticisms of the IMF-backed austerity policies, Dissanayake and his team insisted that they would not derail from the IMF program. This assertion was more visible when the NPP had meetings and summits with Sri Lanka’s business community and professional groups. The NPP also pledged that they will continue debt restructuring negotiations with different governments and private creditors (bondholders), and attempt to secure more debt relief than what was secured by the government led by Wickremesinghe. Although this sounds great, it isn’t an easy task.
Dissanayake comes from a very left-leaning party that used to oppose the policies of the IMF. For him, embracing an IMF program and categorically promising to work with the IMF shows a solid dose of pragmatism. To put it in Dissanayake’s words, deviating from the current path would be irresponsible: “We [Sri Lanka] had already gone to IMF. We cannot seek options outside the IMF basket. That would be too risky for the economy. So whatever the alterations and the amendments that we seek to implement will be within the IMF basket.”
When one reads between the lines, it implies that Dissanayake and the NPP are being very cautious not to deviate from an IMF program – and thus not to replicate the mistake that the Gotabaya Rajapaksa government made in 2020. When Rajapaksa was elected to the presidency in 2019, Sri Lanka was in an IMF program. However, in order to implement the anti-austerity measures and import substitution measures that Rajapaksa had promised during the election campaign, his government opted to stay out of the IMF program. Abandoning the IMF program was one of the key reasons for the collapse of the Sri Lankan economy in 2022.
It seems that NPP understands the price they would have to pay as a political party by getting out of an IMF program merely for the sake of ideology or short-term political gains.
Pragmatism vs Ideology
Pragmatically, the IMF program is not well-loved by many members of the Janatha Vimukthi Peramuna (JVP), the core leftist party of the NPP. However, the practical reality is that deviating from the IMF program would create huge economic instability within a very short span of time, potentially leading to another economic crisis.
The constant reassurance provided by Dissanayake in various forums about the continuation of the IMF program indicated that his administration is willing to be pragmatic more than ideological in its approach to governing. This pragmatism was very much visible through initial actions taken by Dissanayake upon his inauguration, including the continuation of the debt restructuring negotiations. In his inaugural address to the nation, Dissanayake insisted that he would continue with the IMF program and debt restructuring negotiations.
“The change we seek involves many steps that will take time. However, achieving stability and confidence in the current economy is crucial,” Dissanayake said in his inaugural address. “We plan to begin negotiations with the International Monetary Fund immediately and proceed with activities related to the Extended Fund Facility. Additionally, to advance our debt restructuring program, we are negotiating with relevant creditors to expedite the process and secure necessary debt relief.”
He also retained Secretary to the Treasury Mahinda Siriwardana, who has been one of the leading officials in implementing the IMF program although Siriwardana received some criticism during the NPP’s election campaign. Also, despite not voting in favor of the Central Bank Act, which made Sri Lanka’s Central Bank independent, Dissanayake did not attempt to change the bank’s governor. These actions resulted in positive sentiments in financial markets as the Sri Lankan rupee gradually appreciated against the U.S. dollar and treasury bill rates came down slightly.
The Way Forward
The immediate challenge for Dissanayake is to help his party secure a majority in Parliament. The parliamentary election is scheduled to take place on November 14, and it is essential for the NPP to secure a majority as policy decisions, including public finance decisions, are taken by the Parliament. From a political perspective, Dissanayake will have to sustain his popularity to ensure a formidable victory in the parliamentary election. That also means that he has to ensure economic stability till the election – likely ruling out any policy experiments.
The medium- and long-term challenges, however, are different. The Dissanayake administration will have to stay within the IMF program while providing some relief to the various segments of society and conclude the debt restructuring negotiation in a way that it is in line with the NPP’s mandate while also aligning with the interests of the creditors – all without significant delay. The success of these plans heavily depends on the government’s future ability to significantly increase government capacity, which is a prerequisite for the growth, stability, and efficient fiscal policy management of the government. These tasks are of course not easy and this also means that economic growth will be relatively moderate and slow in the short term.
Slow economic growth that addresses the structural weaknesses of the economy would provide macroeconomic stability in the medium term. The question is whether such slow growth would be popular among the public – and the answer is likely no.
The Dissanayake government is likely to seek to maintain public support through actions pertaining to transparency, accountability, and the actions against corruption. However, retaining popularity through these means is a big challenge. A significant chunk of the votes for the NPP seem to have come from Sri Lanka’s middle class. That middle class has a lot of aspirations that cannot be fulfilled in the short term merely by having macroeconomic stability. Meeting middle-class expectations would require substantial economic growth. Thus, cautious and somewhat contractionary fiscal policies would make the Dissanayake government unpopular among many voters hoping for upward social mobility. The biggest medium-term challenge is how to manage voter expectations amid fiscal constraints.
On the other hand, there are expectations from those who strongly oppose neoliberal ideologies and practices that Dissanayake should renegotiate the IMF program and debt relief. The NPP had in fact pledged to do so during their campaign.
An IMF delegation visited Colombo in early October to discuss the future of the IMF program. During these discussions, Dissanayake reaffirmed his commitments to the IMF while highlighting the need for alternative solutions that relieve the burden borne by the people, including some amendments to the Value Added Tax (VAT) and income tax. Sri Lanka had performed well in terms of achieving revenue targets; during the first half of 2024, government revenue was 13.6 percent of GDP. This means the government has some room for changes within IMF targets, and indeed previous President Wickremesinghe said that his government had discussed some potential changes to income taxes and salary revisions with the IMF.
However, restarting debt restructuring negotiations will be more complex. While there are concerns pertaining to the proposed debt restructuring, such as the inclusion of Macro Linked Bonds (MLBs), renegotiating the deal is not easy. The structure of the MLBs was subject to much criticism at the global level as it is designed to repay bondholders at higher rates if Sri Lanka maintains relatively modest economic growth between 2025-27. But, renegotiating it would be associated with substantial risks, including the risks of facing litigation. It seems that Dissanayake had decided to take the risk-averse approach and proceed with the debt restructuring deal agreed with the bondholders, although the current arrangement is likely not the debt deal he and some of his supporters would ideally prefer.
In Sri Lankan politics, as in all things, realities and ideals are two separate things. While ideals are nicer, those who are in power have to deal with reality, which can be bitter. The existing IMF program and debt restructuring, with small leeway for change, is Sri Lanka’s reality. Embracing that reality is political pragmatism, and that’s what Dissanayake has done thus far.
Sri Lanka had received debt relief from its creditors to bring down the public debt-to-GDP ratio to 95 percent by 2032. That is the public debt stock target specified by the IMF to make Sri Lanka’s public debt sustainable. Given Sri Lanka’s long-lasting economic vulnerabilities, a 95 percent public debt ratio is still high. The IMF assessment is based on a Market Access Country (MAC) Debt Sustainability Analysis (DSA), but 95 percent isn’t a comfortable debt ratio for a country like Sri Lanka, with low exports and low government revenue. This was highlighted by Brad Sester and Theo Maret in their analysis.
Ideally, Sri Lanka’s public debt sustainability should have been assessed under a novel DSA framework instead of MAC DSA or Low Income Country (LIC) DSA. While that sounds nice in theory, the chances of such a unique approach happening between 2022 and now were very slim, but it is certainty a matter to be considered in the future.
In addition to its domestic realities, Sri Lankan governments must face a harsh global-level reality: Sri Lanka operates in an international financial system that’s not very beneficial to the Global South. In this financial system, Sri Lanka is a price taker. Thus, whatever battles Sri Lanka chooses to wage against this system should also be pragmatic. Public debt sustainability is a very time-sensitive matter and the repercussions of any experiment could be quite drastic for the population.
Dissanayake’s action implies that he is not going to do any economic experiments soon, and will allow the IMF program to continue with the already set parameters. He still has a long way to go, with many cautious steps to take the country out of the woods.