Sri Lanka: Is the Worst Over?

Dr Anchita Borthakur, Research Associate, VIF

Dr Anchita Borthakur, Research Associate, VIF
January 23 , 2024 Views: 1064 Comments: 0

Sri Lanka is in the process of economic recovery after the Island nation was hit by a severe economic crisis in 2022—the worst since its independence— resulting from poor governance, mismanagement, weak fiscal/monetary policy choices and the havoc created by the pandemic. The crisis led to massive unrest, known as the Aragalaya protests, ultimately forced the then President Gotabaya Rajapaksa to flee the country in July, 2022. Under the new President Ranil Wickremesinghe, the country’s economy has steadily shown signs of improvement; while few longstanding challenges remain intact, with further progress depending on debt restructuring and implementation of structural reform programs. An attempt has been made in this article to highlight the developments that had taken place in Sri Lanka in the year 2023.

Economic Developments

According to the latest World Bank report, Sri Lanka’s economy is expected to grow by 1.7% in 2024 after contracting by 3.8% in 2023.^[1] In a positive direction, inflation fell from a peak of 70% in September 2022 to 4.0% in December 2023.^[2] The IMF Board, which completed the first review under the 48-month Extended Fund Facility with Sri Lanka—the total of about US$3 billion— providing the country with access to around US$337 million to support its economic reforms, have termed Sri Lanka’s performance under the programme as ‘satisfactory.’^[3] Last December, the World Bank released the second tranche of the US$500 million for Sri Lanka^[4] due to the country’s decent economic performance in 2023. While responding to the Sri Lankan authorities’ request for a debt treatment, in November 2023, after year long talks, key bilateral creditors of Sri Lanka, including India, Japan and other Paris Club members reached an “agreement in principle” with the former to restructure US$ 5.9 billion in external debt.^[5] Similar agreement was concluded with China in October which covers $4.2 billion in outstanding debt, an important step to implement Sri Lanka’s economic reform agenda.^[6]

In November, the President Ranil Wickremesinghe announced an ambitious budget for 2024 aiming to “strike a delicate balance between reviving economic growth, alleviating the hardships faced by ordinary Sri Lankans, and maintaining fiscal discipline to meet the International Monetary Fund (IMF) programme targets.”^[7] The government expects to raise Rs.4, 127 billion as revenue, Rs.3, 820 billion from taxes in 2024, which shows a substantial increase from their targets in 2023.^[8] The government estimated for a budget deficit of 9.1 percent of GDP in 2024, which is nonetheless wider than the revised target of 8.5 percent in 2023.^[9] However, given the current scenario, critics question the feasibility of the targets mentioned in the budget.

Political Developments

On the political front, amidst uncertainties, Sri Lanka is gearing up for both Presidential and Parliamentary elections in 2024. In November last year, the President told the Parliament that the government will hold provincial council and local government elections in 2025 – which was postponed indefinitely by the Election Commission earlier last year citing budgetary constraint. The incumbent President Wickremesinghe is hoping for victory in the upcoming Presidential election due to his government’s considerably successful efforts to stabilize the country’s economy, bring back political stability and thus regaining the much needed public trust. In addition, his achievement of bringing sections of the Sinhala Buddhist clergy and few Tamil outfits to the same table in 2023, for resolving the longstanding ethnic conflict prevalent in the country, boosted Wickremesinghe’s confidence of winning the support of all before the next election. However, the deep divisions that have been prevailing in the political spectrum of Sri Lanka can be a cause of concern for his government in the coming days.

The Question of Tamil Reconciliation

On the question of Tamil reconciliation, in July last year the President organized an all-party meeting on national reconciliation program to settle the enduring ethnic issue—the continuation of his efforts in this regard since December 2022. Unfortunately, his ambitious promise of solving the decades long issue and reach at a meaningful reconciliation by 4 February 2023—Sri Lanka’s 75th Independence Day -- didn’t yield any fruitful result. Nevertheless, before the July meeting, President met Tamil parties from eastern/northern provinces and assured them about the devolution of power and full implementation of the 13th Amendment (13A) to the Sri Lankan Constitution with all-party consensus, without the police powers being granted to the provinces.^[10] However, nationalist political parties like Freedom People’s Alliance, National Freedom Front and sections of the Sri Lankan Buddhist clergy/monks opposed this proposal. According to them, the president’s action is a “political stunt to woo the Tamils ahead of the next presidential election due in the last quarter of 2024.”^[11] On the contrary, several Tamil political parties accused the government of continuing with the policy of militarization and state sponsored ‘Sinhalization’ projects in the Tamil inhabited areas of North and East. In addition, despite the Government of Sri Lanka’s recent decision to establish the much delayed independent Commission for Truth, Unity and Reconciliation to resolve the post conflict grievances of the Tamil minorities, majority of the country’s Tamil population as well as the civil society cast doubt on this entirely government led initiative.^[12]

Regional Developments

At the regional level, in 2023, Sri Lanka applied to join the largest trading bloc—Regional Comprehensive Economic Partnership (RCEP)—to rebuild its crisis hit economy. In November last year, Sri Lanka’s cabinet spokesperson indicated that the island nation is also planning to conclude Free Trade Agreements (FTA) with Thailand and Bangladesh by 2024.^[13] In addition, Sri Lanka aims for initiation of FTA with other ASEAN countries as well. Moreover, Sri Lanka’s tourism sector experienced a remarkable growth in 2023 – a robust revival from the impact of various political, economic and security challenges including 2019 Easter bombings and the Covid-19 pandemic. To rebuild the country’s tourism industry, a free Visa regime is also implemented by the government of Sri Lanka for nationals coming from China, India, Indonesia, Russia, Thailand, Malaysia, and Japan in 2023, which has the tremendous capacity to boost its economy.^[14]

Foreign Relations

On the foreign policy arena, in September 2023, President Wickremesinghe attended the United Nations General Assembly (UNGA), where in his address, the President expressed concern on the rising tensions in the global geopolitical landscape and stressed the need for international solidarity and cooperation. In the same month, Sri Lanka also assumed the role as Chair of the Indian Ocean Rim Association (IORA) for two years term. In all these platforms, the President highlighted Sri Lanka’s policy of non-alignment^[15] in dealing with the challenges arising from global power reconfigurations. In October 2023, President Wickremesinghe attended the third Belt and Road Forum for International Cooperation (BRF) – one of the first countries to join the second phase of China’s Belt and Road initiative. At present Sri Lankan foreign policy is mainly driven by the country’s economic considerations and thus Sri Lanka is trying to balance its relationship with all the major players including the regional rivals— India and China— to realise the former’s national interests.

Sri Lanka-India Relations

The year 2023 marked the 75th anniversary of diplomatic relations between India and Sri Lanka. This small island nation occupies a special place in India’s ‘Neighbourhood First’ Policy and SAGAR (Security and Growth of All in the Region) Vision. Therefore, Sri Lankan President Ranil Wickremesinghe’s visit to India on 21 July 2023, the former’s first after he took over as the President in 2022, was remarkable which laid the foundation for renewed bi-lateral ties between India and Sri Lanka based on closer relations in the economic sphere, with the central focus being given on connectivity – maritime, air connectivity, energy, power, trade, economic connectivity, financial connectivity, digital connectivity and also people-to-people engagement.^[16] Both the countries signed/exchanged various MOUs/Agreements and unveiled a vision document for economic partnership titled "Promoting Connectivity, Catalysing Prosperity: India-Sri Lanka Economic Partnership Vision” to “accelerate mutual cooperation in tourism, power, trade, higher education and skill development.”^[17] Moreover, commencement of ferry service between Nagapattinam and Kankesanthurai in last October signalled a new landmark in India-Sri Lanka diplomatic/economic relations by enhancing regional connectivity through people-to-people cooperation between the two nations. In the end of October, India and Sri Lanka also held the 12th round of negotiations on the Economic and Technology Cooperation Agreement (ETCA) in Colombo, which was on halt since 2018.

Furthermore, New Delhi’s unprecedented support to Sri Lanka of around $5 billion as economic aid in 2022— the first country to respond to the latter’s economic catastrophe— was crucial in securing IMF assistance of $3 billion in March 2023. At present, Sri Lanka is in the process of economic recovery with its tourism sector growing exponentially, where the largest arrivals came from India in 2023.

However, two important issues— fisherman/fishing dispute in the Palk Bay and the long pending Tamil national question in Sri Lanka— continued to remain cause of concerns for both the countries. During the Sri Lankan President’s visit, the questions surrounding the implementation of 13th amendment to the constitution of Sri Lanka and fisherman issue were raised by the Indian PM, where the latter announced that various development projects worth Rs 75 crore would be implemented for the Indian-origin Tamil citizens of the country.^[18] In addition, PM emphasized that a humane approach should be adopted by both the states while dealing with the Fishermen dispute. It is believed that India’s constant push on finding a solution to the Sri Lankan ethnic issue encouraged President Wickremesinghe to call for an All Party Conference at the President’s Office on 26 July 2023, soon after he returned from India.

But despite the consolidation of trust building process between Sri Lanka and India after the Sri Lankan President’s visit, on the security front, India remained conscious of growing Chinese inroads to the island nation. In last October, Sri Lanka allowed Chinese research vessel Shi Yan 6 to dock at Colombo port, the country’s main port, adding to India’s security concerns.^[19] This was the second time in last two years that Chinese research vessel arrived in the neighboring country which accentuated Indian fears of being surveil by its rival China. However, in a recent development Sri Lanka imposed a pause or ban of one year on granting permission for foreign vessels to conduct research in the country’s territorial waters—a massive blow to China as the latter was seeking permission to dock yet another research vessel in Sri Lankan water by early this year.^[20] It is significant to mention that a total of 48 Chinese scientific research vessels have been deployed in the Indian Ocean Region since 2019.^[21] Therefore, amid geopolitical strain, this decision by the Sri Lankan government can be termed as a major victory for India as it seems Colombo is not interested in antagonizing its relations with either of the Asian giants, especially in the wake of its general elections, scheduled to take place this year. A balanced relationship with both India and China is the way forward for Sri Lanka to bolster its economic recovery process that will ultimately improve the political landscape of the country as well.

To conclude, 2024 will be a crucial year for Sri Lanka both in terms of the country’s political as well as economic development. Given the current scenario, the island nation has to face the challenge of balancing between the polls and the economic recovery process this year, which will eventually determine the future of the country in the long run.