Sri Lanka: Five Things to Watch in 2023
An economic crisis, mass protests, a fleeing President, half-a-dozen cabinet reshuffles, and plenty more in-between: 2022 was without a doubt tumultuous, even by Sri Lankan political and economic standards. But has the rollercoaster come to an end or will the tumult continue into 2023? Here are five things to watch out for next year that will determine the answer to that question.
1. Will a debt restructure be agreed by February?
Although Sri Lanka reached a staff level agreement with the IMF on the 1 September 2022, the $2.9 billion package will not be approved until debt levels are brought down to a sustainable level. This requires a debt restructure and negotiations with private and bilateral creditors are ongoing. According to reports, China has opposed a restructure and has instead proposed a debt rollover. A debt rollover involves China issuing a new loan to pay off the current debt. Although this may help with the repayment period, a rollover doesn’t reduce Sri Lanka’s debt to the sustainable level that the IMF has required.
China is obviously concerned that if it agrees to a debt restructure with Sri Lanka, it would set a bad precedent for other countries to which it has given loans. China’s reticence to agree to a debt restructure is also delaying private creditors from formally agreeing to a restructure as well. Meanwhile, the Paris Club group of creditors has agreed to a 10-year moratorium on debt repayment as part of the restructure. According to reports, India and Japan have agreed to a restructure as well on principle.
Sri Lanka’s usable foreign reserves are essentially zero. Thus far, it has managed to address some of the shortages in essentials that existed earlier this year through a combination of import restrictions, budgetary reallocations, and short-term bridge financing support from the World Bank and ADB. However, these are temporary solutions and based on current trends, the country will once again run out of money around March 2023 unless the IMF package is approved by then.
If Sri Lanka is unable to secure the debt restructure and the subsequent IMF package by March 2023, it is likely to see similar conditions to that of mid-2022 when the country had severe shortages of essential imports such as fuel, gas, and pharmaceuticals. Another cycle of shortages could once again catalyse a new wave of protests.
Note: For a detailed explanation on the economic factors that led to the current crisis, read here.
2. How long will the Wickremesinghe-Rajapaksa coalition last?
It is abundantly clear that President Wickremesinghe hopes to contest the 2024 Presidential election. His path to victory is entirely dependent on successfully managing the economy through the crisis. This requires the passage of unpopular macroeconomic reforms such as tax increases, privatising and reforming several state owned enterprises, and reducing public sector expenditure. These reforms are antithetical to the populist, inward looking political and economic ideology of the Rajapaksa-led SLPP. For now, the SLPP has supported several reforms over the past few months (e.g. tax increases and reforms to the Ceylon Petroleum Corporation), mostly for political survival rather than a shift in ideology.
The Wickremesinghe-Rajapaksa coalition will survive as long as the SLPP supports the President’s agenda. Wickremesinghe promised not to dissolve parliament early in order to secure the support of SLPP MPs during the Presidential election in May. However, if the SLPP blocks reforms that secures his path to success in 2024, he is likely to go back on this promise. He is reported to have already vaguely made the threat to secure the passage of the 21st Amendment. The threat will gain fresh impetus from late-February 2023 onwards when the President has the power to dissolve parliament anytime at his discretion.
Anti-Rajapaksa sentiment continues to remain high and the SLPP is keen to delay an election until they are able to regroup. The playbook of the SLPP is two fold. Firstly, they are keen to distance Mahinda Rajapaksa and Namal Rajapaksa from the policy decisions made under Gotabaya Rajapaksa’s presidency (even though Mahinda Rajapaksa was Prime Minister at the time and Namal Rajapaksa was a Cabinet Minister). Secondly, several degrees of separation are being formed between Namal Rajapaksa and the current government. The reforms are being framed as Ranil Wickremesinghe’s decisions. The SLPP hopes that this distance will help them ride a wave of anger against unpopular economic reforms in the future. Both strategies, however, depend heavily on time for people to move on from the current economic collapse and focus their attention on the new reforms.
3. Will local council elections be held or postponed?
The SLPP’s reticence for elections is not just at the national level. Constitutionally, local council elections are due in March 2023. Yet the President and the SLPP will try their best to delay the election, for a multitude of reasons. Following local council elections in 2018, the SLPP has a dominant hold on grassroots organising. Losing this hold at the local council level now will therefore damage their longer-term electoral plans. Moreover, if an election is to be held in early 2023, the SLPP and President Wickremesinghe’s UNP will have to contend with the choice of contesting as a formal alliance or not. Both options are unfavourable to both parties. If contesting as an alliance, local council MPs from the SLPP and UNP will have to compete for the same nomination. While a split ticket may split the vote amongst a shrinking support base.
Moreover, the local council elections will be framed by the opposition as a referendum on the current government. A major loss to the governing coalition will therefore provide credence to claims that the current SLPP-UNP coalition government lacks a mandate and increase pressure to hold parliamentary elections.
All indications are that the government will attempt to delay the election by creating a state of limbo under the guise of electoral reforms. The government is keen to introduce electoral reforms to reduce the number of local council members. If introduced before the election is announced, this will require a new delimitation report and its passage can be delayed indefinitely, similar to what has happened with the Provincial Councils.
It is important to note that if local council elections are delayed as well, Sri Lanka will enter a period where it won’t have any elected officials at the sub-national level.
The Elections Commissioner has stated that he will announce the local council election during the first week of January. But as any student of Sri Lankan politics would tell you, let’s see it to believe it.
4. Will the President deliver reconciliation?
President Ranil Wickremesinghe is seen by many as being more progressive on finding a solution to Tamil political grievances than others. This narrative developed following the 2002 ceasefire agreement. It’s easy to look progressive when compared to the blatantly majoritarian policies under the Rajapaksa presidencies and the unwillingness of Opposition Leader Sajith Premadasa to take a clear stance on the matter. Nevertheless, Wickremesinghe’s standing amongst Tamil politicians was made evident by the reportedly unprecedented split within the TNA during the vote for President in parliament. The President has previously argued that his genuine efforts to find a solution have been blocked by an uncooperative President when he has been Prime Minister. Now that he is President, it is to be seen if President Wickremesinghe can finally deliver on his decades long commitments or if he follows in the footsteps of his predecessors of promising solutions when in the opposition and failing to deliver when in power.
Recently, the President convened an all-party meeting to find a permanent solution to the ethnic question. At this meeting, it is reported that participants agreed in principle to develop a roadmap and the President has set a timeline of delivering a solution before the 75th Independence Day on 4 February 2023. True reconciliation will obviously take time and no single policy decision or agreement will achieve that. Moreover, Sri Lanka’s history is full of committee reports and roadmaps for reconciliation that have never seen the light of day. However, if the President actually succeeds in delivering a viable political framework that addresses the ethnic question it would be a major game-changer and a significant moment of progress in Sri Lankan history.
5. How will Sri Lanka manage growing tensions between India and China?
As already discussed, India and China are key players in Sri Lanka’s debt restructure negotiations and major trading partners. Therefore, they cannot afford to alienate either and attempts to play one against the other will only result in alienating both. This requires a nuanced understanding of their respective domestic and regional incentives and a Sri Lankan foreign policy tailored accordingly. Unfortunately, instead, Sri Lanka has appeared foreign to a policy when managing this relationship. This was clearly evident during the truly embarrassing diplomatic fiasco over the docking of the Yuan Wang 5 vessel in August.
India’s economy is estimated to become the fastest growing major economy and the most populous country in the world next year, while it contends with concerns over inflation and unemployment. India will also become the G20 chair and be given a major global platform to demonstrate its international credentials on several fronts. The undercurrent to all the developments will be Indian domestic politics, as they are scheduled to have nine state elections next year and a general election in 2024. Prime Minister Narendra Modi’s Hindu-nationalist agenda is likely to become even more prominent as a result. Meanwhile, China’s economy will be looking for a fast recovery as it comes out of strict COVID restrictions. They will also have to contend with companies looking to reduce their supply chain dependency on China over the past two years. As these dynamics play out, Sri Lanka will have to contend with potentially growing tensions between the two regional powers. There have already been several recent skirmishes along the Sino-Indian border. Sri Lanka’s challenge, therefore, would be to navigate through these tensions and find a way of engaging productively with both.
