It is a pertinent question that everybody asks why Sri Lanka still remains a developing country. The country has failed to realise its enormous potential to be prosperous economically. In its post – independence era, Sri Lanka, as a country, endured many a challenge- both man-made and natural. It was battered by the civil war that lasted for three decades until it ended with the elimination of the LTTE in May, 2009. The country was engulfed in flames due to senseless violence unleashed by the JVP during the 1988/89 period. The country was battered by the 2004 tsunami that killed nearly 40,000 people. Worse, Sri Lanka had to reel under the impact of its gravest ever economic crisis in recent times and, in fact, the country was declared bankrupt in April, 2022.
What is remarkable in the event of each of these challenges is the fact that Sri Lanka, as a nation, bounced back in record time. The latest example is the completion of the debt restructuring process after a tedious process of diplomatic, bilateral and multilateral engagements. It even involved balancing out geopolitical rivalry between the west and the east since China, as the largest bilateral creditor to Sri Lanka, has to be dealt with separately. Now the country has finalised its agreements with the Official Creditor Committee of the Paris Club of Nations and EXIM Bank of China to be signed.
President Ranil Wickremesinghe who initiated the process is now about to announce it to the public in a special statement today. It naturally amounts to be a significant milestone in contemporary history. Once debt restructuring is done, the country is likely to secure a grace period in servicing its the external debts that amount to US $ 37 billion, including outstanding external debt installments amounting to US $ 5.5 billion from April 2022. Afterwards, debt servicing will be phased out in a sustainable manner for the country to forge ahead.
Once that is achieved, it will improve Sri Lanka’s credit rating and enable the government to raise loans for projects to be launched afresh and for the resumption of ones remaining stalled at the moment due to bankruptcy. For the government, it is an achievement in the real sense, and it will try to make political mileage out of it.
The President has chosen to make a televised address to the nation today to flesh out details on the breakthrough in the process of debt restructuring. It is being planned as a moment of celebration with some fanfare in the country.
Successful debt restructuring will, of course, bolster the government’s legitimacy and public support to implement long-term economic policies. The crucial development comes ahead of the Presidential Election pending later this year. The Election Commission will take charge of the process related to the conduct of the Presidential Elections after July 17. The President is now going to make the announcement less than a month ahead of the initiation of the process. It leaves scope for people with political interests to assume that the government has timed the announcement to boost its election campaign.
No matter what, the country’s debt sustainability holds both political, social and economic significance.
Sri Lanka’s public debt, particularly external debt, has reached unsustainable levels. Servicing this debt consumes a significant portion of government revenue. It, then, limits the funds available for development and social services. The country has been caught in this vicious circle for years. Finally, it was declared bankrupt. It even ran short of foreign exchange required to purchase essentials two years ago. The country faced periods of high inflation and currency depreciation, which eroded purchasing power and led to economic instability. The economic crisis led to widespread shortages of essential goods, including fuel, food, and medicine. Poverty and social unrest were the end results.
During the past couple of years, the situation improved with inflation coming down to 1.6 percent in May, according to the National Consumer Price Index. Petrol lines are no longer visible, and people can tank up at their will. Food prices still remain high, but there is no shortage of any. The country has bounced back from the economic crisis and proven its resilience once again against any formidable challenge. In the past, Sri Lanka proved the same resilience in the wake of challenges of epic proportion in the past. In the backdrop of them, history afforded it with opportunities to revitalise its economy for greater prosperity. But, all were missed opportunities.
Once debt sustainability is ensured through the restructuring process, it should not be construed as an opportunity to be complacent about only. In fact, it should be made an opportunity to build on with strategic economic reforms, improved governance, and adept management of geopolitical relationships. Then, it will enable the country to overcome its obstacles and realise its potential. The debt restructuring is only a critical step. It should be accompanied by broader systemic changes to ensure long-term growth and stability.
Now, the Presidential Election is also coming up. Any incoming government will find it difficult deviate from the current reforms agenda. It is a process to be handled with finesse in the future.
The government’s handling of the economic crisis and its aftermath will significantly impact public perception and future electoral prospects. Transparent and effective communication is essential to regain public trust.
Sustainable development will require continued prudent economic management by any future government. Any government’s ability to leverage this moment for lasting economic reforms will be crucial in determining Sri Lanka’s future trajectory.
