A Cautionary Tale: Influence of Sri Lanka’s Politics on the Economy

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Source: facebook.com

Written by – Ranuli at OmeBiz

On the 26th of October, Sri Lanka plunged into a political predicament with two prime ministers claiming for power over the nation flinging the country’s democracy into a severe constitutional crisis. This most recent twist in Sri Lanka’s political saga sprung when President Maithripala Sirisena replaced Prime Minister Ranil Wickremesinghe and installed the former President Mahinda Rajapaksha in replacement. Now the country is at a point where it is governed by two government entities.

This political turmoil has created an unstable situation that Sri Lanka simply cannot afford to have at the moment. Development has been halted indefinitely, the economy has begun to deteriorate slowly, businesses have taken a downturn and the international reputation of the country has plummeted down.

What has this situation truly resulted in?

  • Japan has put on hold the soft loan of $1.4 Billion they offered Sri Lanka for the Light Railway Project.
  • Millennium Challenge Corporation withholds $480 million aid program for improving land administration and highway construction.
  • The International Monetary Fund’s loan facility of $1.85 Billion offered to Sri Lanka for economic reforms in 2016 has been suspended.
  • Foreign Direct Investment outflows amounted to Rs. 22.9 Billion from 25th of October to 7th of November alone. The week ending 16th of November saw Rs 1.95 Billion foreign outflows.
  • The country continues to experience losses with the Dollar appreciating. The Rupee currently stands at 178.39 Rupees against the Dollar today.
  • Moody’s Investor Services downgraded Sri Lanka’s ratings for foreign currency issuer and senior unsecured ratings from B1 to B2 as a result of the current political disruption. This has shifted the country’s outlook from stable to negative. The banks downgraded were Hatton National Bank, Sampath Bank and Bank of Ceylon.
  • The budget for 2019 has not yet been released and the country has a sovereign bond of $1 Billion that matures on the 10th of January.
  • Tourism industry faces losses in millions due to cancellations.
  • Sri Lanka faces the risk of losing GSP+ (Generalized System of Preferences Plus) concessions on garments and fish exports on account of poor human rights record and weak democratic credentials.
  • Finally, what’s most surprising is how the fuel prices have reduced despite the turmoil. However, these reductions have also resulted in the Ceylon Petroleum Corporation being landed with a debt of over Rs. 350 Billion!

Despite the economic downfall, the country’s political situation remains unsolved. The Parliament has been summoned four times to date, but no final decision has been made. Also, just last week, the Parliament experienced unprecedented violence as the supposed lawmakers of the country threw furniture and chilli powder at one another after the no-confidence voice vote. Furthermore, the president’s refusal to accept the no-confidence motion has resulted in a standoff between the two parties, which is running on its fourth week now.

Parliament is set to be summoned today, with a hope in settling the current political crisis. Will the country’s political situation finally resolve? Or without a legitimate government and no legal way to meet public expenditure and obligations, will Sri Lanka’s economy plunge off the cliff for good?