First election to be held after the declaration of bankruptcy in April 2022.    

The Sri Lankan presidential election, scheduled for September 21, will be the first election of any kind since the economic crisis of 2022, which led to Sri Lanka declaring bankruptcy and seeking an International Monetary Fund (IMF) bailout.

The Ranil Wickremesinghe government had indefinitely postponed the long-overdue Provincial and Local Body elections, citing bankruptcy. However, the Sri Lankan constitution required that the presidential election be held on the scheduled date.

Despite financial inflows from the IMF, bilateral donors, and international financial institutions since 2022, Sri Lanka’s economic situation remains dire, with high prices and stagnant incomes.

Therefore, bread and butter issues are at the core of the Presidential election.  

Wickremesinghe, who is standing as an “Independent”, is highlighting the way he led Sri Lanka’s recovery from the depths of despair. This recovery is evident in the availability of goods and services, albeit at high prices.

But his two principal rivals, Sajith Premadasa of the Samagi Jana Balawegaya (SJB) and Anura Kumara Dissanayake of the National Peoples’ Power (NPP), are stoutly challenging his claims, highlighting the common man’s inability to endure a situation where he faces high prices and high taxes without an increase in his earnings.

The fact is that, at the ground level, the economy remains sluggish, and opportunities for increasing incomes are still limited.

Economic Crisis

In 2022, Sri Lankans experienced unprecedented power cuts and shortages of essential commodities such as food and fuel. Inflation hit 50%. Protests broke out in April as serpentine queues formed at cooking gas and petrol stations. Schools were shut, and office-goers were asked to work from home.

Sri Lanka imported US$3 billion more than it exported, thereby depleting its foreign exchange reserves. In 2019, it had US$7.6 billion in forex reserves, which dwindled to US$250 million. Mismanagement and bad policies compounded the difficulties created by COVID.

In April 2022, for the first time in Sri Lankan history, the then government led by President Gotabaya Rajapaksa decided to default on the repayment of foreign loans, which totalled more than US$83 billion.

Following massive protests, Gotabaya Rajapaksa fled and resigned from exile in July. Acting President Ranil Wickremesinghe was then elected President by Parliament. Using emergency powers, Wickremesinghe restored order and began reviving the moribund economy.

Recovery

Rushing to Sri Lanka’s aid, India, the US, China, and the Paris Club collaborated to secure an IMF-sanctioned bailout of US$3 billion.

The World Bank pledged another US$600 million. India pumped in US$4.5 billion as credit to restore supplies of essentials.

In 2023, as part of the IMF reform program, Sri Lanka introduced income taxes for higher earners, ranging from 12.5% to 36%. It also raised other taxes to cover critical purchases.

On the positive side, inflation dropped to about 5.9% from 70% in 2022. The economy expanded by 4.5% in the fourth quarter of 2023. Interest rates also fell, the rupee rebounded, and foreign reserves increased.

Creditor countries such as India, Japan, and France agreed to defer debt repayments until 2028, giving Sri Lanka space to rebuild its economy. 

Wickremesinghe brought down power tariffs by 22.5%, which is expected to lead to a reduction in the prices of goods by 20%.

Downside

The downside is that people, especially in the urban areas, are still complaining about high prices and taxes.

In an article dated 13 September 2023, published by Project Syndicate, Professors Jayati Ghosh and Kanchana N. Ruwanpura pointed out that the IMF had pledged only US$3 billion over four years.

It is a “tiny fraction of what the country needs to meet its debt-servicing requirements and just one-sixth of its foreign-exchange earnings, which amounted to roughly US$18 billion in 2022”, the economists pointed out.

The IMF imposed a series of conditions that significantly exacerbated Sri Lanka’s cost-of-living crises, the authors added.

The shift to market exchange rates led to a sharp currency devaluation, causing imported fuel and food prices to skyrocket and contributed to a 165% increase in electricity tariffs between June 2022 and February 2023.

“As fiscal restraints were imposed, the economy continued to spiral down, with GDP shrinking by 7.8% in 2022 and 11.5% in the first quarter of 2023. This has had an adverse impact on employment, livelihoods, and the viability of small and medium-size enterprises.”

“Consequently, real wages fell by 30-50% in 2022 and have remained stagnant,” the authors said. 

Although there was a modest increase in corporate income taxes, wealth tax was avoided. Leftists complain that Wickremesinghe has let the wealthy off the hook while squeezing the poor.

Value-Added Tax, which applies to all, was raised to 18%. Thus, the bulk of additional revenues were generated through indirect taxes that disproportionately affected ordinary people.

The government reduced the interest rates on sovereign bonds held by Sri Lanka’s largest pension fund, the Employees Provident Fund, from more than 20% to 12%, and then to 9% from 2025 until maturity.

Economist Ahilan Kadirgamar has said that this will result in a 30% decline in the value of retirement funds a decade from now.

The Employees Provident Fund is often the only financial asset of the working class. But this too will be subject to a 30% tax on its returns—higher than the tax rate applied to the corporate sector.

Rural-Urban Divide

However, there could be a rural-urban differential. Rural folk have reasons to be happy with Wickremesinghe’s government.

The import of diesel and petrol with the US$4.5 billion from India and the dollars from the IMF, along with the removal of the ban on chemical fertilisers, was a boon for farmers.

Moreover, rural folk do not feel the pinch of high prices as much as urbanites do, because they do not buy food with cash daily like urban workers and office-goers. Nor do they use public or private transport on a daily basis.

Premadasa and Dissanayake

Wickremesinghe’s challengers, Sajith Premadasa and Anura Kumara Dissanayaka, have said they will renegotiate parts of the IMF deal to benefit the poor.

But Wickremesinghe has warned that any bid to amend the IMF deal could adversely affect ties with India, China, the Paris Club of creditors, the US, and international lending agencies.

And, more frighteningly, the horrible shortages might return. 

Experience vs Inexperience

The Presidential election is also a contest between administrative experience and inexperience. In contrast to Wickremesinghe, both Premadasa and Dissanayake lack political and administrative experience.

Wickremesinghe has been Prime Minister five times and has held all important portfolios, including Finance. So far, Premadasa has only held the portfolio of Housing, a minor ministry in Sri Lanka. Dissanayake has no administrative experience whatsoever; as a Leftist, he has been an agitator and an MP throughout his political life.

As non-doctrinaire and right-wing politicians, Wickremesinghe and Premadasa will be amenable to the US and the West. But Dissanayake is a Marxist, ideologically anti-West and pro-China. He is a Sri Lankan “nationalist” who will fight perceived encroachments by external powers. 

Dissanayake has been anti-India throughout. While releasing his manifesto, he spoke about how Sri Lanka’s consumer goods market is dominated by Indian products and emphasised the need to end this. He followed this by saying that the giant oil tanks at Trincomalee, given to India by a bilateral agreement in the 1980s, will be transferred to a consortium of foreign entities through a tender.