Sri Lanka’s new president looking for parliamentary backing
Sri Lankans elected a new president as traditional political leadership disappoints. Dramatic changes, however, are unlikely if he must govern with the opposition.
In a nutshell
- President Dissanayake faces challenges in securing a parliamentary majority
- Balancing IMF commitments and populist promises is crucial for stability
- Foreign policy will be tricky, with India, China and the U.S. all playing roles
On September 21, 2024, Sri Lankans elected Anura Kumara Dissanayake, a 55 year-old former Marxist, as their tenth president, paving the way for a new parliament and extensive reforms in the debt-ridden country. Mr. Dissanayake beat incumbent President Ranil Wickremesinghe, who is widely credited with successfully negotiating the International Monetary Fund (IMF) bailout that brought Sri Lanka’s economy out of bankruptcy two years ago. Mr. Wickremesinghe, who had earlier served as prime minister for multiple terms, was chosen as president by the parliament rather than a popular vote in 2022 after massive protests and riots on the heels of an economic crisis that forced out the directly elected president, Gotabaya Rajapaksa.
President Dissanayake and the three-member cabinet he has appointed have little experience with governance. He won the election out of public frustration with Sri Lanka’s traditional political elite; people clamored for change and a move away from political corruption. Mr. Dissanayake promptly dissolved parliament on September 24, hoping that his left-wing National People’s Power (NPP) coalition would win a majority in snap parliamentary elections scheduled for November 14. That is still possible, but seems unlikely.
In the last parliamentary election in 2019, Mr. Dissanayake’s party won only three seats in the 225-seat unicameral chamber. His personal popularity and the outcome of the 2022 crisis might not be enough, however, for his allies to secure a majority in a newly reconstituted parliament. If the NPP does not win outright, it will be forced to make deals with other parties, all of whom it accuses of representing the old order. President Dissanayake may even have to cohabitate with an opposition figure as prime minister under the country’s French-style constitution. He will, however, retain significant power and will not hesitate to exercise it.
The country and Colombo’s foreign policy
Sri Lanka, an island nation of 22 million, was once seen as a model for countries around the developing world. But it has been wracked by years of ethnic conflict and civil war between its Buddhist Sinhala majority and the Hindu Tamil minority living mostly in the northern and eastern provinces. The country is also plagued by widespread corruption among the powerful, predominantly Sinhala, political families.
The new president, who does not come from a politically connected family, has promised ethnic reconciliation and to persevere with IMF-dictated macroeconomic reforms while easing the burden on poor Sri Lankans. Fulfilment of these domestic goals may be hard to deliver, and requires deft handling of foreign policy.
Sri Lankan leaders have historically hedged their bets by balancing ties between India and China.
Strategically located in the Indian Ocean just 55 kilometers southeast of the southern tip of India, Colombo has to be mindful of New Delhi’s concerns. Sri Lankan leaders have historically hedged their bets by balancing ties between India and China, the latter of which became a major investor in Sri Lanka during the 13-year political dominance of the Rajapaksa family led by former Presidents Mahinda and Gotabaya Rajapaksa.
Following the fall of the Rajapaksas in 2022, Colombo has sought to balance relations with the United States, India and China, all of which have become lifelines for the country’s troubled economy. However, balanced foreign policy going forward is not assured as the Dissanayake administration intends to continue on the path set out by the previous administration for Sri Lanka to apply for membership in BRICS.
Sri Lanka’s domestic politics
Mr. Dissanayake won the election on a populist wave, reflecting middle-class sentiments against corruption as well as the strict economic conditions imposed by multilateral financial institutions. He faced incumbent President Wickremesinghe, in office since 2022, who ran as an independent; Sajith Premadasa of the United People’s Power (Samagi Jana Balawegaya, or SJB) whose father served as president from 1989 until his assassination in 1993; and Namal Rajapaksa of the Sri Lanka People’s Front (Sri Lanka Podujana Peramuna – SLPP).
In keeping with the Sri Lankan tradition of high turnout at elections, 75 percent of the populace voted. This was the first direct presidential election in which no candidate secured more than 50 percent of total votes. Mr. Dissanayake came in first with 42.3 percent, while Mr. Premadasa was second with 32.8 percent, and President Wickremesinghe came in third with 17.3 percent. After an unprecedented counting of second preferences, Mr. Dissanayake was declared the winner with more than a million more votes than Mr. Premadasa.
Most candidates had not advised their voters to mark second preferences. Had Mr. Wickremesinghe and Mr. Premadasa, who were both part of the United National Party (UNP) at one time, agreed to identify each other as their voters’ second preference, Mr. Dissanayake might not have won. It is not yet clear whether the two politicians can overcome their disdain for one another ahead of upcoming parliamentary polls; after his loss, former President Wickremesinghe has ostensibly retired from politics.
While young voters supported Mr. Dissanayake for his anti-corruption promises, older voters struggled to overcome concerns over the violent past of his political party, the Marxist Janatha Vimukthi Peramuna (JVP). During the 1970s and 1980s, the JVP carried out two armed insurrections against the Sri Lankan state. Those concerns could hinder JVP, and its allies in the NPP, in the parliamentary elections.
In dire financial straits
While President Dissanayake has been careful to assert that he would largely abide by the IMF bailout program as negotiated, he has expressed concerns over some of the strict conditionalities and a desire to roll back some of the austerity measures. His avowed desire to provide relief to citizens could lead him to return to populism, which might not help address Sri Lanka’s structural economic challenges.
Two years ago, Sri Lanka defaulted on its external debt and in May 2022 the country declared bankruptcy. A $2.9 billion bailout package from the IMF came with strict conditions, including economic reforms and restructuring of Sri Lanka’s debts to all creditors, including China.
Sri Lanka has long been a rarity in South Asia as a country with high human capital indicators, which are metrics used by the World Bank to gauge a nation’s potential for prosperity. The country’s elite, however, has failed to build on this, choosing instead the easier path of populist economic nationalism and ethnic majoritarianism.
The 2022 bailout package was the country’s 17th loan from the IMF since 1965. Colombo’s economic woes are the result of years of reluctance to raise taxes, excessive dependence on tourism and remittances for foreign currency earnings instead of exports, a populist preference for indigenization, and expensive foreign loans to build shiny infrastructure.
Sri Lanka has suffered significantly due to reduced tourist earnings and high petroleum prices caused by the Covid-19 pandemic and the Ukraine war. The Rajapaksa government banned fertilizer imports as part of a misdirected indigenization program, causing food shortages and a drastic fall in crop yields. Remittances from overseas workers, which stood at $7 billion in 2020, dropped to $3.8 billion in 2021-2022 and have only recently climbed back to $6 billion. Sri Lanka’s tourism industry, which generated $5.8 billion in revenue in 2018, plummeted to $1.8 billion in 2020 and has only partially recovered, hitting $2 billion in early 2024.
Although the fuel and food shortages of 2022 have eased over the last two years, most Sri Lankans resent the continued high cost of living and rollbacks on public spending resulting from IMF conditionalities. Having forgotten the immediate crisis and what bankruptcy looked like, President Dissanayake’s voters want the resumption of government welfare programs and an easing of austerity measures. Resisting populist impulses might not be easy for the new president, but economists are already counseling him to remember the past consequences of such politics.
Hooked on borrowing
Sri Lanka has one of the lowest revenue- and tax-to-GDP ratios in the world at 8 percent. Instead of cutting government spending, Sri Lankan politicians have routinely opted to borrow heavily. The country’s external debt stands at $37 billion, of which $11 billion is owed to multilateral banks while commercial loans account for $14 billion. The rest is owed to bilateral donors, including China, which is owed the most at $4.7 billion.
Under Beijing’s Belt and Road Initiative (BRI), Sri Lanka’s elite – like those in other South and Southeast Asian polities – borrowed heavily for economically unviable infrastructure projects. As a result, China has increasing leverage over the island country. In 2017, China acquired a 99-year lease over Hambantota – a Sri Lankan port on the Indian Ocean – in lieu of repayment for their loan. President Dissanayake has promised to review the terms of Chinese loans and to reconsider some of the more expensive ongoing projects.
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Managing inflation and restoring confidence of domestic and foreign investors will be crucial for the incoming government. Sri Lanka’s dollar bonds fell by 3 cents on election day, reflecting concerns among foreign investors over friction between the incoming president and the IMF, should Mr. Dissanayake decide to renegotiate the bailout. The situation then eased after the president’s promise that he will not break commitments already made to the IMF. Inflation, which in 2022 skyrocketed to 69 percent, is declining and stood at just 1.5 percent in May 2024, down from 6.4 percent at the start of the year.
Unemployment, which stands at around 6 percent, is another major issue. It is higher than the 4 percent of the pre-Covid period, while youth unemployment is much higher at around 25 percent. His government will need to chart a path that fosters economic grow in a way that provides employment opportunities to the young people who came out in large numbers to vote for him in the presidential election.
The president will have to choose between keeping austerity commitments to the IMF and fulfilling promises to his base.
To reassure both multilateral institutions and the markets, President Dissanayake has retained most of the senior bureaucrats in the finance ministry and central bank. His team has had conversations with the IMF, World Bank and Asian Development Bank to reassure them of policy continuance. The renegotiation of loan terms that President Dissanayake promised during his campaign will wait until after the parliamentary elections.
Once a new parliament is in place and a new government formed, the president will have to choose between keeping austerity commitments to the IMF and fulfilling promises to his base about higher salaries for government employees, expanded welfare programs and a rise in subsidies for farmers.
A similar choice confronts President Dissanayake on the foreign policy front. His party’s Marxist and revolutionary roots might pull him further in China’s direction, but he cannot ignore the reality that in crunch times – such as the fuel and food shortages of 2022 – it is India that proves more useful to Sri Lanka.
Colombo’s path forward
Resentment against the IMF bailout loan and strict economic measures catapulted Mr. Dissanayake into office, but the new president has pledged only to renegotiate rather than scrap them. Over the last two years, the IMF, India and other bilateral donors, such as Japan and the U.S., have helped Colombo ride out its economic crisis. It would be difficult for President Dissanayake to turn his back on them at this stage despite his government aiming to join BRICS and move closer to China and Russia.
The political preference of Mr. Dissanayake’s coalition is for a protectionist local economy, indigenization of industrialization and strengthening small businesses and enterprises. Although the new government is unlikely to nationalize anything in the near future, it will certainly put off privatization of state-owned enterprises. Major policy decisions will come after the parliamentary election.
Scenarios
Most likely: Elections slow leftward drift amid cooperation with the opposition
The most likely scenario is that President Dissanayake will adopt a more compromising wait-and-see policy following his focus on winning seats in the parliamentary elections. Even if a prime minister from President Dissanayake’s coalition can be installed, the government would face strong parliamentary opposition. If, as expected, the president and prime minister end up being from different parties – and ideologies – then the lack of consensus on core policies will block Marxist initiatives that could move Sri Lanka too far left, too quickly.
Less likely: Economic gains undermined
A less likely scenario is that the economic gains of the last two years will be undermined and leftward drift ensues. This could take place either due to a breakdown of communication between a prime minister and president who are from opposing parties, or because President Dissanayake’s left-wing coalition wins an outright parliamentary majority and faces demands from within his party to implement its preferred leftist economic policies.
Least likely: Disagreements cripple the government and lead to fresh elections
The least likely scenario is that within the next year or two, President Dissanayake’s disagreements with a prime minister from another party result in the president dissolving the parliament, dismissing the prime minister, and calling for parliamentary elections again.
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