Sri Lankan President Ranil Wickremasinghe built confidence in the public that he had the final solution for the Sri Lankan crisis. Wickremasinghe has managed to chart a path out of the difficult political-economic environment along with the International Monetary Fund (IMF). Should Pakistan and Bangladesh follow in his footsteps?
It is one year since the toppling of the autocratic regime of Sri Lanka’s president Gotabaya Rajapaksa. The family regime in Sri Lanka, with President Gotabaya, Mahinda Rajapaksa, the prime minister, and several other siblings, was ousted by the people’s uprising in July 2022. After several months, the ousted president Gotabaya returned to the island and now resides with all presidential privileges entitled to a former president, including a new house given by the state. In the past, Sri Lanka has been a case where the state has protected corrupt and political criminals. Today, the same tradition continues in the island nation.
The new president Ranil Wickremasinghe appointed (not elected) by former president Gotabaya Rajapaksa for the remainder of the term, has taken some pragmatic measures to stabilize the economy along with the same political allies of the previous regime. Wickremasinghe’s experience as six times prime minister and his international exposure helped to quickly recalibrate the previous policy blunders which dragged the nation towards bankruptcy.
The IMF’s initial funding helped the economy stabilize and move on the right track. Inflation was at 70 percent last year, and now it’s at 12 percent in June 2023. There is a 76 percent jump in remittances funneling $3.2 billion into Sri Lanka. The reserves hit a 14-month high of $3.5 billion in May 2023. The currency appreciated by about 18 percent this year. No extreme shortages, no fuel queues, and no 13-hour power cuts in the country. Foreign Minister Ali Sabry speaking with CNN, says, “We have entered into deep reforms of the economy. Significant progress has been made in all sectors of the economy“. The IMF EFF has helped to win back the confidence the country lost due to past policy missteps. The inward ultra-nationalistic policy prescription with the military at the forefront of the government sector reduced the democratic space and pragmatic policies required. Wickremasinghe has stabilized the economy and moved away from his predecessor’s ill-logical policies.
Chinese Lobbying and Debt Restructuring
According to IMF, 60 percent of low-income countries are now at high risk of debt distress. Sri Lanka, Zambia, Ghana, Ethiopia, and Pakistan have already defaulted or are on the cusp of doing so. China is a significant creditor in all these cases. Between 2000 and 2017, China’s lending of projects in other countries totaled more than $800 billion. In Sri Lanka, it was a clear case of unsustainable loans with unsustainable projects with high-level corruption, which I have explained in my recent book ‘Teardrop Diplomacy,’ a case study that many other debt-distressed nations could understand the underlying issues of the Sri Lankan crisis.
The Sri Lankan Parliament passed the government’s Domestic Debt Optimisation (DDO) plan – a condition under the IMF program to restructure $ 19.8 billion of the $42.1 billion domestic debt. The DDO proposal seeks a rescheduling of debt, extensions on repayment times, and reduced interest on Sri Lankan government debt, including those held by pension funds.
Sri Lanka still must rework a large chunk of its $36 billion foreign debt, including $12.5 billion in international sovereign bonds and $11.3 billion in bilateral credit owed mainly to China, Japan, and India. After the IMF EFF, multiple Chinese officials are visiting Sri Lanka with more offers of loans and unsustainable investments. On May 30, 2023, Vice Foreign Minister Sun Weidong co-chaired the 12th round of China-Sri Lanka diplomatic consultation with Foreign Secretary of Sri Lanka Aruni Wijewardane in Colombo. China’s reputation was severely impacted by the fall of the Rajapaksa regime. China is making strategic maneuvers to correct this position. A few weeks ago, Namal Rajapaksa, son of Mahinda Rajapaksa, was in China on a private visit; perhaps China is renewing its past strategy with the Rajapaksas. Sri Lanka should be extra cautious in borrowing further for unsustainable projects drawing a lesson from its past. China has also sponsored many trips to Sri Lankan officials to visit China to create a strong lobby group to push Chinese proposals and BRI projects. China will invest heavily to lobby in this regard. During my recent visit to China World Economic Forum in Tianjin, I saw the attempt of China to promote Sri Lanka’s BRI success on large screen presentations; the engineering marvel of the construction of the “Lotus Tower” in Sri Lanka was one such exhibit. Sri Lankan foreign minister Ali Sabry speaking at the session on Global Debt Explosion said: “There is a lot to learn from Sri Lankan experience; debt servicing was 160 percent of our entire revenue for the year; there should be a global debt architecture to address the emerging threat of debt stress”. China would have to play a central role in this global debt architecture. China could assist Sri Lanka with its existing Chinese loans to restructure for debt reduction or haircut than add more loans.
Crisis in Pakistan and Bangladesh
When the crisis in Sri Lanka was triggered, many in the Washington policy circle were keen to understand the next country that would have a similar crisis in South Asia. Pakistan was identified due to its large, unsustainable borrowing on massive infrastructure projects such as China Pakistan Economic Corridor (CPEC), close to $40 billion, which has failed to generate the expected revenue. There have been multiple economic policy blunders where foreign reserves will deplete to the point of default, with political instability being identified as a key driver to equal the Sri Lankan case. “We are now in a worse situation than Sri Lanka was,” said Pakistan’s former Prime Minister Imran Khan in an interview with Fareed Zakaria, explaining the absence of democracy and the rule of law in Pakistan. Around 10,000 workers are arrested, the entire senior leadership of PTI is in jail, and “there is law of the jungle” in Pakistan, said Khan. With the growing political instability and economic dysfunctionality, Pakistan went for IMF assistance in a similar pattern to Sri Lanka, on the brink of defaulting on its debts and having barely enough in foreign currencies to pay for a month of imports. The International Monetary Fund (IMF) approved a $3 billion bailout for Pakistan. The crisis-hit nation will receive $1.2 billion upfront; the rest will be paid out over the next nine months.
Another South Asian nation Bangladesh, also received assistance from IMF for a $4.7 billion loan in January 2023, had fallen short of the minimum foreign reserve criteria set when the IMF approved its loan. Bangladesh is struggling to stabilize its economy due to foreign reserves dropping from last year (See graph). The country remains without power for long stretches, just like the Sri Lankan case the previous year. Bangladesh’s electricity generation is squeezed by a lack of dollars to import fuel, oil, gas, and coal.
In all three cases (see Table 1), Sri Lanka, Pakistan Bangladesh, there are significant political and economic challenges, with democratic space curbed by their leaders and rampant corruption.
The high volume of unsustainable debt and foreign exchange crisis is visible. The rent-seeking political elites and public distrust have widened over time due to corruption and autocratic maneuvers to reduce the freedom of expression. When assessing corruption in all three nations, there is a downward slope in CPI Score from 2019. This means corruption has gotten worse year by year.
Reducing Democratic Environment
Despite clear economic stabilization in Sri Lanka, the government is introducing new Acts, such as the Anti-Terrorism Act (ATA)and Broadcasting Act, which will reduce democratic space and media freedom. On Human Rights, Wickremasinghe has crushed the protests, and there were multiple arrests of critics and activists. Wickremasinghe borrows the playbook of Gotabaya’s ‘National Security pretext’ to reduce the democratic space. On Sri Lanka’s human rights issues at UNHRC, Wickremasinghe is strategizing to win support from Islamic countries. The recent comment by Wickremasinghe backing Pakistan’s resolution over Quran burning and questioning UNHRC’s role is in this regard.
Further, the local elections were delayed from March 2023, impacting the democratic space. While there are pragmatic economic recovery measures, there is the closing of democratic space in Sri Lanka. The same trend is visible in Pakistan; the elections in Khyber Pakhtunkhwa and Punjab provinces, which are 70% of Pakistan, are scheduled for May 14 with the decision of the Pakistan Supreme Court. The government postponed the elections.
In Bangladesh, the Digital Security Act (DSA) has arrested more than 400 individuals under the false pretext of national security, minimizing the freedom of expression. Sri Lanka’s new Electronic Broadcasting Regulatory Commission Act (EBRCA) will follow the same path where five members will evaluate content under the national security prism, where the media license will be terminated.
Rent-seeking political elites and rampant corruption is one of the fundamental issues of the crisis. The Rajapaksa family members and their political allies were involved in corruption scandals. It’s not only the Rajapaksas; there was corruption during the Sirisena-Wickremasinghe rule, the Central Bank Bond scam. All corruption cases are pending, and the corrupt were not punished. Sri Lanka never had independent institutions to tackle corruption in the recent past; politicians influenced Bribery Commission and other independent institutions, and Director Generals were removed by political influence.
The conspicuous corruption is evident by offering expensive vanity projects with no returns and some projects, such as Mattala Airport, operating at a loss.
The poor and vulnerable groups are facing much hardship from the crisis in all three nations; the poverty rate could increase in Sri Lanka from 25 to 27 percent this year, and daily income earners are still finding it difficult to live due to the rising cost of living. Sri Lankan Government has said it will roll out a direct cash transfer program to about 2.3 million families later this month and pledged to spend $680 million yearly on their welfare. But critics say the monthly handout of 2,500 rupees ($8) to 15,000 rupees, based on poverty levels, is inadequate.
The social agitation could rise over the rising cost of living and increasing poverty levels. There is a human cost where extreme poverty could increase in debt-distressed nations by delaying and not reaching an agreement on debt restructuring and relief. While the IMF program could bring economic stability to all three countries initially, much more must be done to avoid political turmoil. The undemocratic practices of curbing media freedom and delaying elections are not a solution. While the initial diagnostic report of IMF will be out in September for Sri Lanka, where the government is required to answer, it will indicate its commitment to making the difficult reform choices necessary. Pakistan and Bangladesh will face similar political and economic challenges in the coming months.
Asanga Abeyagoonasekera is a Senior Fellow at the Millennium Project in Washington DC and the author of ‘Teardrop Diplomacy: China’s Sri Lanka Foray’ published by Bloomsbury (2023).