Sri Lanka’s new finance minister faces challenge of winning back international confidence

ECONOMYNEXT – Prime Minister Ranil Wickremesinghe’s appointment as crisis-hit Sri Lanka’s finance minister has raised some hopes locally for longer-term economic policies, but international donors are still wary because of the past experiences.

Since Wickremesinghe was appointed as prime minister on May 12, the intensity of the main protest near presidential secretariat has declined and the number of participants has drastically come down.

But the key issues which led to the youth-led protests – extended power cuts, long queues for fuel and cooking gas, and lack of medicines – still remain and have gotten worse in the last two weeks.

Political analysts see Wickremesnighe as a credible political leader among many corrupt Sri Lankan politicians given his personal track record, the  the black mark from the infamous central bank bond scam notwithstanding.

“However, this time, his personal credibility may not help him get international assistance to come out of the economic crisis,” a political analyst who was close to the last government told EconomyNext asking not to be named.

“Every time the international community supported Wickremesinghe and he improved the economy, the opposition toppled his government and derailed economic policy gains. So, this time, the international community is not ready for such a derailment.”

“They want a policy commitment that’s sustainable over a long period of time whether Wickremesinghe is there or not. If Sri Lanka needs to come out of this economic crisis and prevent another crisis, the country needs a sound economic policy, and that is what the international community expects from Sri Lanka this time.”

Some Sri Lanka Podujana Peramuna (SLPP) lawmakers told EconomyNext that the international community has delayed financial assistance plans to the country because of the concerns over Rajapaksas still remaining in power.

“Some international partners have said they will not help as long as the Rajapaksas are in power,” a former cabinet minister told EconomyNext.

“This is one of the reasons that compelled former prime minister Mahinda Rajapaksa to vacate his post and this is why no Rajapaksas are in the cabinet now,” he said.

“Even President Gotabaya Rajapaksa’s presidency is seen as an impediment to foreign financial assistance.”

Tough policy actions 

New Finance Minister Ranil Wickremesinghe has already explained the reality of the island nation’s crisis-hit economy to the nation.

Unlike the former ruling SLPP ministers, Wickremesinghe told the truth to the public. In a televised address, he mentioned that there is no reserves to pay for any imports. He warned of an impending food shortage in August. He spoke of economic conditions worsening further, of longer power cuts, and more money printing for public sector salaries at the expense of rupee depreciation.

Already, the country’s policy interest rates have been doubled to a higher level, private sector imports are curbed to a minimum and government capital expenditures are slashed, fuel prices are raised to record levels, and the rupee is trading around a record low level after flexibility was allowed in the exchange rate.

However, the key reforms have yet to be even discussed.

Economist say these key reforms may be extremely painful. Among them are: raising taxes, downsizing a bloated public sector, job losses, increase in electricity and water prices, possible privatisation of loss-making state-owned enterprises (SOEs) such as SriLankan Airlines, the Ceylon Petroleum Corporation (CPC), and the Ceylon Electricity Board (CEB).

Central Bank Governor Nandalal Weerasinghe this week said more hardships are expected when the economy worsens further.

“We will see the worst contraction this year than any other years in history. There is no other choice,” Weerasinghe told a forum this week.

Many economists warn that the next few months will be “scary”, until stability returns.

Meanwhile, Wickremesinghe is expected to navigate Sri Lanka through these troubled times as finance minister with a new budget and a new economic policy regime.

But for the international community, implementation of such economic policy under Wickremesinghe is not going to be enough. Sri Lanka’s international partners want a credible policy to sustain the country’s economic recovery from the current crisis.

“It is not about them supporting Sri Lanka to come out of this crisis, but about sustaining the economic recovery,” the political analyst said.

“So, whether Rajapaksa coming back or a fresh Rajapaksa coming to power is immaterial to them. What the international community needs is credibility and sustainable and sound economic policies despite whoever is in charge.”

Contraction to positive growth

Sri Lanka was saved from the brink of similar economic collapse when Wickremesinghe served as prime minister in 2001-2004 and 2015-2019 with Sri Lanka’s international partners backing his governments for economic policy reforms including fiscal adjustments to reduce the budget deficit.

However, he could not complete his reforms on either occasion and the country’s gain in economic policies was eroded soon after the next government took over.

During 2001-2004 tenure, Wickremesinghe with the support of international community, focused on economic policies under a policy package titled “Regaining Sri Lanka” amid an internationally brokered ceasefire agreement between the government and the Liberation Tigers of Tamil Eelam (LTTE) who fought for an independent state for ethnic minority Tamils.

He took over an ailing economy that had seen its worst growth in history by then. The complete destruction of Sri Lanka’s only airport by the LTTE brought Sri Lanka’s economy to its knees and Sri Lanka hardly got any international support because most of the money was pumped to fight the war.

Wickremesinghe reined in government expenditure by stopping state sector recruitment while boosting revenue by encouraging private sector investments. He also ensured 4.5 billion US dollars in financial aid at the Tokyo donor meeting with the support of Sri Lanka’s friends abroad.

However, the then opposition led by Mahinda Rajapaksa started to agitate against the Wickremesinghe government’s policies. Rajapaksa along with his then close allies Wimal Weerawansa and former finance minister, late Mangala Samaraweera spearheaded the anti-government campaign against Wickremesinghe and his policies.

The allegations were: Wickremesinghe was selling the country, he was succumbing to international pressure, he was more lenient with the LTTE, he was a traitor because he did not care about the military and LTTE leader Veluppilla Prabakaran would get what we wanted, a separate Elam.

Accepting her party members’ demand, then president Chandrika Bandaranaike Kumaratunga dissolved parliament in February 2004 leading to the defeat of Wickremesinghe’s center-right United National Party (UNP), which continued to languish in the opposition for 11 years.

The new government led by president Kumaratunga and Prime Minister Mahinda Rajapaksa in 2004 started to provide jobs for over 50,000 unemployed graduates in the public sector. The move eroded all economic policy gains under Wickremesinghe that was backed by Sri Lanka’s international partners led by Japan.

When Rajapaksa became president in 2005, the country gradually prepared and proceed to finish the war. Rajapaksa provided the political leadership to end the war, but failed the country economically despite the International Monetary Fund (IMF) and other international partners helping the country build up the war ravaged nation. His government also failed at reconciliation efforts that the internationally community had expected.

Rajapaksa’s sins haunt policy credibility

Wickremesinghe also got a rare opportunity to put the country into a strong economic footing when he was a powerful prime minister in the last government under former president Maithripala Sirisena.

However, the government which gave priority to good governance had to compromise on many tough economic policy decisions because of the unlikely coalition between the center-right UNP headed by Wickremesinghe and center-left Sri Lanka Freedom Party (SLFP) headed by  Sirisena.

The central bank bond scam also put a dent in Wickremesimghe’s credibility and his “Mr Clean” image despite him being proven innocent.

However, his economic policy framework with higher taxes, fuel price formula, reduced government expenditure, leasing Hambantota Port to China, a joint venture to operate the East Container Terminal (ECT), the Trincomalee oil tank farm deal with India, and a 480 million US dollar grant from the US-based Millennium Challenge Corporation (MCC) were criticised in creative but often dishonest ways by the Rajapaksa-led opposition.

Rajapaksa using his immense popularity tried to prove that Wickremesinghe could not stabilise the economy. For this, he used many tactics which are now history.

When there was a fuel shortage in November 2017, Rajapaksa along with his MP son Namal travelled to parliament by bicycle to protest the shortage.

Every time he got a microphone to speak, Rajapaksa would ask sarcastically “den sepeda’ (“feeling better now?”) or “obata sathutudha den?” (“are you happy now?”). His biting commentary about price increases of essentials, shortage of cooking gas, and about the fuel formula, though intellectually dishonest, struck a chord with voters.

His party members told the public that the IMF was the main curse on the country and Wickremesinghe had been working with the IMF to bring the economy to a standstill.

At a press conference, when Rajapaksa said the rupee had been depreciating, a journalist asked him how would he stabilise the rupee. There was no answer from Rajapaksa, but his close ally Weerawansa said their party had done it before under Rajapaksa and they knew how to make the rupee stable.

Rajapaksa, true to form, built up his political power by ridiculing Wickremesinghe’s economic policies which were expected to bring some stability to the country.

The 2019 Easter Sunday attack followed by anti-Muslim riots were the final nail on the Wickremesinghe-Sirisena’s government and the 73-year-old current finance minister’s economic development drive.

Rajapaksa’s tactics worked and Wickremesnghe’s UNP could not even win a single seat at the August 2020 parliamentary election. Wickremesinghe who had been in parliament for 43 consecutive years could not win back his own seat in the Colombo district.

That was the end of Wickremesinghe’s second chapter of sustainable economic policy reforms.

The last chance?

Now, he has been given another chance to prove himself as a majority of people do not want to see Rajapaksas serve as ministers and decision makers anymore. Protests have erupted islandwide against the once beloved dynasty.

However, critics are still doubtful that  Wickremesinge will pull it off. He had failed every time he held a parliamentary majority and now he does not have a single UNP lawmaker to back him.

With past experiences of eroded policy credibility, many donors do not want to burn their hands this time by helping Sri Lanka get out of the mess, a Western diplomat told EconomyNext.

“What the international community is looking for is long-term policy credibility and sustainability. Every time there were policy changes for the better, we saw political upheaval and policy reversal. That is the key reason for the current economic crisis,” the diplomat said.

In line with the diplomat’s comment, the World Bank on Tuesday said it had no plans to help Sri Lanka until there was an adequate macroeconomic policy framework outlined.

“We are concerned for the people of Sri Lanka and are working in coordination with the IMF and other development partners in advising on appropriate policies to restore economic stability and broad-based growth,” the World bank said in a statement.

“Until an adequate macroeconomic policy framework is in place, the World Bank does not plan to offer new financing to Sri Lanka.

“We are currently repurposing resources from previously approved projects to help the government with some essential medicines, temporary cash transfers for poor and vulnerable households, school meals for children of vulnerable families, and support for farmers and small businesses,” the Bank said. (Colombo/May25/2022)