Sri Lanka is emerging from a crushing financial crisis and is looking to the newly installed President Dissanayake to speed up reform and bring relief to his people. Below are the key challenges he has to tackle:
Economy And Growth
A dire shortfall in foreign exchange reserves in 2022 pushed Sri Lanka’s economy into its worst crisis in decades. While the economy has since taken tentative steps towards recovery, a lot remains to be done.
Inflation has moderated to 0.5% from a crisis-peak of 70%, while the economy is expected to grow in 2024 after shrinking 2.3% last year and 7.3% at the height of the crisis.
Dissanayake will have to ensure the economy returns to sustainable and inclusive growth, reassure local and international markets, attract investors and help a quarter of the 22 million population climb out of poverty.
IMF Programme, Debt Work
A four-year, $2.9 billion IMF bailout, secured in March 2023, has helped Sri Lanka boost reserves, stem a fall in its currency and tame runaway inflation. It also set the groundwork for debt restructuring talks.
In June, Colombo inked deals with China and other creditor nations to restructure about $10 billion in bilateral debt and last week reached a draft deal to restructure $12.5 billion of international bonds. The debt rework is crucial to reach a 2.3% of GDP primary balance target by 2025, the key fiscal target set by the IMF.
But Dissanayake could seek changes to the bondholder deal. He has also promised to seek amendments to taxation goals under the IMF programme but has committed to repaying debt.
Taxation
Dissanayake promised to bring change for those reeling under austerity measures linked to the IMF bailout but his party has just three of 225 seats in parliament and needs to find a way to get its backing. Passing an interim budget under IMF bailout terms could also prove a difficult task.
He has promised to dissolve parliament within 45 days of taking office and call for snap general elections to seek a fresh mandate for his policies.
Dissanayake said he will have discussions with the IMF to adjust their programme and reduce taxes and free up public revenue for tax relief and investment. He has pledged to remove VAT on some health, education and food items. But the measures could affect fiscal deficit targets set under the IMF deal.
Jobs And Welfare
Dissanayake has promised to revamp state companies to make them more profitable, create 20,000 new teaching jobs, and create more opportunities in key sectors such as tourism. He has also pledged to expand existing welfare schemes.
But missteps in public finances, fixing loss-making state companies and strained foreign exchange reserves could limit his ability to quickly move forward on these pledges.
Geopolitics
Colombo has sought to balance ties with neighbour India and with China, leading creditors and investors who are also jostling for geopolitical influence on the island.
Japan, India and China are key parties to Sri Lanka’s $12.5 billion debt rework. Dissanayake has expressed his intention to continue working with them and foster economic ties to boost growth.
(with inputs from Reuters)
