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Sri Lanka’s Economic Crisis Needs a Political Fix

As negotiators from the International Monetary Fund try to hash out a bailout for Sri Lanka at talks in Washington this week, they’ll no doubt press the need for stringent economic reforms. Any such rescue will fail unless political changes are made, too.

Politics helped bring about the country’s current crisis. An earlier government led by then-president Mahinda Rajapaksa borrowed heavily from China and elsewhere to finance ambitious infrastructure projects, saddling Sri Lanka with unsustainable debts. His brother, former defense secretary Gotabaya Rajapaksa, then swept to power in 2019 and packed the government with cronies and relatives, including Mahinda Rajapaksa as prime minister and another brother as finance minister. The following year, the president pushed through constitutional changes giving himself sweeping new powers.

Virtually unchecked, Rajapaksa has made a series of economic blunders. He slashed taxes just before the coronavirus pandemic wiped out tourism revenue and remittances. After a ratings downgrade squeezed off access to credit markets, he tried to save dollars by banning chemical fertilizer imports in favor of organic farming, devastating the country’s crucial tea and rice harvests. He resisted turning to the IMF for months, instead spending rapidly dwindling currency reserves on a futile effort to prop up the rupee and looking to India and China for financial aid.

With less than $2 billion in foreign-exchange reserves left, the country is running out of money to pay for essential imports. High oil prices have led to power cuts as long as 13 hours a day. The rupee has plummeted against the dollar, while consumer prices rose nearly 19% in March from a year earlier. Huge crowds have turned out to demand Rajapaksa’s ouster.

The government has begun to admit some mistakes. A new team of technocrats has been appointed to advise the government on the crisis and a new cabinet sworn in. A well-respected new central bank governor has raised interest rates by 700 basis points. In addition to approaching the IMF, the government has acknowledged that it can no longer service its debts, setting the stage for talks with creditors. 

Yet any deal with the IMF will require a commitment to painful austerity measures, including tax hikes and spending cuts. An embattled government that lacks broad-based political legitimacy will have a hard time convincing the fund that its pledges are believable. Meanwhile, the chances of bringing opposition parties into a national-unity government remain slim as long as the president continues to wield such vast powers.

Rajapaksa shows no signs of resigning, and an effort to impeach him looks likely to fail. The opposition would be wiser to concentrate on stripping the presidency of its executive powers, effectively making the position ceremonial and moving Sri Lanka to a traditional parliamentary system. Voters have backed such reforms in the past, and the president himself has now suggested he is open to changes. They would open the door to a unity government that could seal a deal with the IMF, negotiate credibly with overseas creditors, and implement needed structural reforms before calling for fresh elections. If a full rollback of the president’s role proves impossible, Parliament should at least eliminate the added powers Rajapaksa won in 2020 and restore the independence of key institutions, including those meant to oversee elections, public services, the police and anti-corruption investigations.

Even under the best of circumstances, ordinary citizens will face widespread suffering before Sri Lanka emerges from this crisis. Partners including the U.S. and India should ease their pain with much-needed food aid, fuel and medicines, while pressing for political reforms. Sri Lankans shouldn’t have to pay so high a price for the mistakes of their leaders.

More From Other Writers at Bloomberg Opinion:

The Street Has Spoken. Will Sri Lanka’s Strongmen Listen?: Ruth Pollard

Sri Lanka Shows the Folly of Fringe Theories: Mihir Sharma

The Great Chinese White Elephant of Sri Lanka: Andy Mukherjee

The Editors are members of the Bloomberg Opinion editorial board.

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