The news that former and current Presidents have been waiting for finally materialised last week, with at least one international rating agency upgrading Sri Lanka’s sovereign credit rating. The upgrade by Fitch from ‘Restricted Default’ to ‘CCC+,’ which has long been coming – going by pronouncements of the previous President while in office – formalises this island nation’s economic status as no longer being bankrupt. The delay in the upgrade appears to have been due to the finalisation of the debt restructuring process, which finally came to a close this month, two-and-a-half years after it began, with the International Sovereign Bond holders accepting the swap offer announced by the Central Bank of Sri Lanka.
While former President Ranil Wickremesinghe on many an occasion pre-empted the ‘out of bankruptcy’ declaration, obviously with an eye on the polls, it did him no good – as the results indicated. But that should in no way take the shine off the now vindicated yet painful endeavour to put Sri Lanka’s derailed economy back on track during his brief tenure.
While credit for the completion of what must surely qualify to be among the most complex debt restructuring attempts anywhere in the world in the recent past involving multiple parties should go to Wickremesinghe, the fruits of his efforts have accrued to the current dispensation, which now, with the nation’s sails finally raised, has the relatively easier task of setting them in the right direction in order to catch the wind.
That, however, is another story altogether, with a perceived Left-of-Centre regime attempting to portray a Right-of-Centre outlook, judging by its actions thus far, sending out mixed and confusing signals to both the domestic as well as international community. Nevertheless, with the good news coming barely a month after the National People’s Power (NPP) took office, President Anura Kumara Dissanayake’s outfit now has the opportunity to fulfill the promises it made to the people without the distraction of bankruptcy. It must do so not only to validate its credentials, which are increasingly under scrutiny, but also for the sake of this long-suffering nation, whose citizens have routinely been taken for granted by regimes past.
While the sovereign rating upgrade opens up access even in limited form to international financial markets once again – access that was cut off during the ‘default’ rating, it also exposes the regime to its first real test of economic policy, which has as its cornerstone a ‘no more loans’ policy. Interestingly, the regime has so far paid scant regard to its own pre-election economic policy, preferring to not upset the applecart and go along with Wickremesinghe’s economic model, save for some cosmetic changes with minimal impact. Having already subscribed to the Wickremesinghe model by default in the absence of an alternative, it will indeed be interesting to see how the regime balances the task of keeping its Marxist Janatha Vimukthi Peramuna (JVP) core – which decidedly has a different outlook – happy, while keeping the economy ticking.
Be that as it may, for the first time in three years Sri Lanka will be celebrating a new year as a nation on the rebound. With Sri Lanka’s Gross Domestic Product (GDP) growth rate for the third quarter of this year recorded at 5.5% – incidentally the last quarter prior to Dissanayake assuming office as President – largely driven by significant expansion in industrial, agricultural, and service sectors, it is now up to the Dissanayake administration to press the right buttons in order to maintain the positive momentum. Whether pressing those buttons will be in accordance with its published policy document, for which the people extended a handsome mandate, only time will tell, but its actions thus far appear to be rife with policy contradictions.
As far as the hardworking man on the street is concerned, who understandably has little interest in sovereign ratings, debt restructuring, access to markets, or international funding, the basic yardstick is whether his plate of rice and curry will be fuller in 2025 than it was in 2024. The NPP must not lose sight of the fact that it rode to office promising a fuller plate and with the travails of bankruptcy now in the background, there is nothing preventing it from implementing the agenda the people sanctioned with an overwhelming mandate. Therefore, it is only natural for people to expect a better deal in 2025.
It is probably in response to that reasonable anticipation that the President, who is also the Minister of Finance, offered what appeared to be a relief package to the working class in Parliament last week. Interestingly, the first to respond to Dissanayake was former President Wickremesinghe, who claimed that he too attempted to raise the tax-free income limit to Rs. 200,000 but that the International Monetary Fund (IMF) was only amenable to the limit being raised to Rs. 150,000 from Rs. 100,000. The response, while taking the shine off Dissanayake’s offering, also appeared to be a not-so-subtle attempt to claim credit for the economic rebound that created the monetary space for the latest adjustment. The increase however fell short of the NPP’s own election promise to adjust the tax-exempt ceiling to Rs. 200,000, by conveniently passing the blame on to the IMF.
What the NPP in general and Dissanayake in particular may not have realised is that by passing the buck to the IMF for its failings – perceived or otherwise – it is perpetuating the system of bending before the international lender, a system it promised to change. Having unmercifully critiqued previous regimes for the longest time, even going to the extent of accusing them of outsourcing the functions of the Ministry of Finance to the IMF, the NPP, now by its own admission, is following suit, with the IMF continuing to hold sway.
As far as the common man is concerned, the ‘relief’ intended through raising of the tax liability threshold appears to have been negated by the decision to raise Withholding Tax on fixed deposits from the current 5% to 10%. In other words, the regime seems to be taking back with the left hand what it is giving with the right. In doing so, it is probably leaving a big chunk of the people falling within this category worse off, especially a sizeable segment of senior citizens who depend on deposit interest for survival. Besides, with no respite in the cost of living, with most essentials still at prices that prevailed at the height of the financial crisis, and even electricity prices likely to remain the same for the next six months, many are discovering that the change in regime has not translated into a change in personal fortunes.
Having shouted from rooftops that the working masses as well as those retired ought to get a better deal while in Opposition, reality seems to have struck the NPP that there is nothing called a free lunch. What is provided as relief needs to be compensated from elsewhere. As far as the regime is concerned, its options for alternate measures to take the pressure off the people are limited to three: reducing the cost of living, increasing export revenue to fund ‘relief,’ and cutting down expenditure.
Sooner or later the regime has no choice but to take the bull by the horns and tackle the issue of cutting down State expenditure. In order to do so it will have to look at downsizing the bloated State sector that has twice as many employees than it actually needs. The issue will be further aggravated with the intended digitalisation of government. However, embarking on such a venture will be like kicking the ladder that put the regime on top, given that almost the entirety of the State sector voted overwhelmingly for the NPP at the last poll.
But circumstances being what they are, rather than taking the easy route of giving with one hand and taking with the other through onerous taxation, the regime must realise that it can only tax so much. It must realise that it also does not have the luxury of taking time in making the tough decisions it promised in its manifesto in order to spring clean the system, which if done well will provide ample resources for ample relief to the people.