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Sri Lanka’s Happily Ever After?
Sri Lanka’s September presidential election was a watershed moment. The left-leaning political outsider, Anura Kumara Dissanayake (AKD), was elected as the 9th President of Sri Lanka. AKD’s rise reflects the electorate’s desire for change, following the 2022 crisis which doubled the poverty rate and shrunk the middle class. His platform appealed to voters by promising to curb corruption and provide tax relief, but also antagonized markets by proposing fiscally irresponsible tax exemptions and challenging Eurobond restructuring negotiations – raising serious concerns about economic stability. His JVP/NPP alliance, which has existed on the periphery of Sri Lankan politics, only added to the uncertainty.
Yet, developments since AKD’s inauguration on September 23rd have shown him to be a pragmatist. Despite public critiques, he retained the Treasury Secretary and Central Bank Governor – two men who have been crucial to the Eurobond restructuring negotiations. He also gave the greenlight to the previous government’s Eurobond restructuring agreement and appointed a key private sector representative, Duminda Hulangamuwa, former Chairman of the Ceylon Chamber of Commerce, as one of his economic advisers, signaling openness to the private sector.
So, is Sri Lanka’s post-election outlook more certain? It is hard to say. The country has seen a material improvement since the crisis: inflation has slowed to 1.1% y/y from 54%, growth is beating expectations, and forex reserves have climbed to $6bn from $1.7bn. Despite this, the path to recovery remains extremely narrow. The government is set to achieve its first primary surplus in five years (only its fourth since independence) and must maintain this over the medium term to ensure the country’s debt sustainability. The prospect of achieving this remains uncertain, given AKD’s competing incentives – balancing the recovery against delivering on election promises.
If AKD and his party (which is projected to win a majority in the November elections), continues to embrace economic pragmaticism, momentum behind Sri Lanka’s economic turnaround should remain positive. His anticorruption platform could play a crucial role in keeping voters onside despite a pivot to more centrist economic policy. We will be watching developments on this front closely.
Since Sri Lanka’s debt burden remains heavy (108% of GDP), the shift in the political landscape provides an opportunity mitigate any future debt risks. The outcome of the November 2024 legislative elections, 2025 budget, and third IMF EFF program, will provide us a clearer view of the path ahead.
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