With the results of the Presidential Election held last week, Sri Lanka has done well to ensure a smooth transition to a president and a new caretaker government. It is a tribute to Sri Lanka’s democratic traditions and public desire to see change that the transition was carried out without any protest, violence and upheaval. However, Sri Lanka must now move quickly to signal to the world where it is heading in terms of policy.
Fitch ratings issued a statement pointing to the uncertainty of the policy direction of the new Anura Kumara Dissanayake Government could delay the completion of the foreign-currency debt restructuring or renegotiation of the IMF programme until a budget is adopted. The rating agency stated that the upcoming 2025 Budget, which is to be adopted by November 2024, could offer clarity on the new government's policies bringing certainty back to the economy. As such, one of the key roles of the new administrations will be to move quickly to continue the process of debt restructuring and stay in dialogue with the IMF. Fitch Ratings has affirmed Sri Lanka's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'RD' (Restricted Default) and Long-Term Local-Currency IDR at 'CCC-'. Fitch typically does not assign outlooks to issuers with a rating of 'CCC+' or below. Meanwhile Moody’s rating expressed their opinion that while there was a change in the government, the reforms agenda will likely continue, while warning that some policy reprioritisation could elevate credit risk for the upcoming period.
Addressing the nation last evening (25), President Dissnayake stated: “However, achieving stability and confidence in the current economy is crucial. We plan to begin negotiations with the International Monetary Fund immediately and proceed with activities related to the extended credit facility. Additionally, to advance our debt restructuring programme, we are negotiating with relevant creditors to expedite the process and secure necessary debt relief. We are confident that we can gain the support of both the people of this country and the international community, and we believe that through this collective support, we can achieve success,” (extracts from the PMD translation). Dissanayake’s statement is timely and important. However, it must also translate into action, and soon. In this regard, it was judicious of the new government to retain the services of the Treasury Secretary and Foreign Secretary, while not moving to change the Governor of the Central Bank of Sri Lanka. It is imperative that Sri Lanka sustains the dialogue and processes it has already committed to. President Dissnayake also held discussions with CBSL Governor Dr. Nandalal Weerasinghe and Treasury Secretary Mahinda Siriwardana earlier this week (24) where key financial matters and issues related to the IMF programme had been discussed. One can only hope that such linkages will sustain policy continuance. Retention of key figures that played a role in negotiating the IMF agreement and debt restructuring will go some way in boosting confidence in the international arena.
Fitch ratings said that they expect economic growth to recover to 3.9% in 2024 and average at 3.6% over 2025-2026 as the real GDP growth. It said that a weak IMF programme implementation, in particular of fiscal measures, remains a risk to achieving debt sustainability as Sri Lanka has a weak longer-term revenue raising record, but the authorities have implemented several major tax measures since May 2022 to boost revenue collection and achieve debt sustainability which saw revenue collection improve by 42% year on year in the first half of this year.
President Dissanayake also called for a united effort to change Sri Lanka’s political culture and rebuild its economy. While stressing that the NPP caretaker government will move ahead with reforming the state sector, he said: “We are advancing steadily towards the desired changes, ensuring that public service remains intact and citizens are not adversely affected. We are committed to creating a law-abiding nation and fostering a disciplined society while ensuring the social security of all citizens. This revives the principle that everyone is equal before the law.”
Moving forward, Dissanayake’s Government should not make the mistake the Wickremesinghe administration made by not being adequately transparent. The new Government must communicate, and frequently, both with its domestic and international audience. Clarity and policy continuance is key at this stage.