Thiloththama Jayasinghe, Jadetimes Staff
T. Jayasinghe is a Jadetimes news reporter covering Business News
The selloff in Sri Lanka's dollar bonds accelerated yesterday as political uncertainties escalated ahead of the country's elections later this month.
According to a Bloomberg report, investors have been reducing their exposure to Sri Lankan assets amid concerns that a potential change in leadership could disrupt ongoing debt restructuring talks, which are nearing a conclusion.
The nation’s dollar-denominated bonds due in 2030 fell by 3 cents, reaching 49.9 cents on the dollar, marking their lowest level since February. This represents a 15% decline from their peak earlier this year. Bonds due in 2027 also experienced a drop, losing over 1 cent to trade at 49.6 cents on the dollar.
This financial strain comes at a critical moment as Sri Lanka approaches its September 21 elections. The uncertainty surrounding the country's political landscape has alarmed investors, who fear that a leadership shakeup could jeopardize the already stalled debt discussions. These talks are seen as crucial for stabilizing the country's financial situation after it defaulted on foreign debt last year.
The opposition has signaled intentions to renegotiate Sri Lanka’s current arrangement with the International Monetary Fund (IMF) if they come into power, adding further uncertainty to the situation.
Emerging-market sovereign analyst Eng Tat Low from Columbia Threadneedle Investments commented on the situation, noting that Sri Lanka may need to make additional adjustments to its agreement with bondholders. He added that while volatility is expected to continue, the recent steep decline in bond prices could also present opportunities for investors engaged in “bargain hunting.”
Sri Lanka has faced probably the most tumultuous two years in political history, along with economic crises and changes in leadership. Briefs of major political developments follow.
Economic Crisis and Public Outrage (2022)
Sri Lanka has been going through one of the darkest economic crises since 2022. The foreign reserves had dried up, and the country was suffering greatly due to acute shortages of basic items, including fuel, food, and medicines. Too much borrowing, poor governance, the COVID-19 pandemic, and Easter bombings in 2019 created an economic meltdown that crippled tourism-one of the sources of foreign exchange for this country.
It led to inflation skyrocketing, its currency devaluating, and rolling power cuts that absolutely ruined the living standards. Blame fell upon the ruling Rajapaksa family at the helm, comprising President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa. The overnight organic farming policy of the government in 2021, banning chemical fertilizers, had actually worsened agricultural output and made the food crisis worse than before.
Protests and "Aragalaya" Movement (2022)
The economic collapse led to island-wide protests-Infamous as the "Aragalaya"-Struggle-movement, which started in March 2022. Young and old, from all walks of life, protested in the streets to demand that Gotabaya Rajapaksa and many significant political figures in the country resign from their positions. The Galle Face Green in Colombo became the site of this large-scale, peaceful, youth-driven movement.
Amid growing protests, the government imposed a state of emergency, which did little to ease public discontent. The situation further deteriorated into violent clashes between the pro-and anti-government groups in May 2022, forcing Prime Minister "Mahinda Rajapaksa" to resign on May 9, 2022, following a day of deadly clashes.
Leadership Crisis and Gotabaya Rajapaksa's Resignation (2022)
Finally, in May 2022, following growing pressure, the president appointed Ranil Wickremesinghe, an experienced politician and United National Party leader, to take over the mantle of Prime Minister. No less a political operator, Wickremesinghe had the experience to provide stability and could negotiate with the IMF to tackle the economic collapse of the country. His appointment was almost inconsequential in appeasing the protesters, who viewed him as belonging to a similar mainstream political echelon which they rejected.
The climax of this crisis was on July 9, 2022, when protestors stormed key government buildings - amongst them the Presidential Palace - which led to President Gotabaya Rajapaksa fleeing the country. He first went to the Maldives and later to Singapore, from where he officially resigned, an unprecedented event in Sri Lankan political history.
Ranil Wickremesinghe's Presidency (2022-2024)
The Sri Lankan Parliament, after Gotabaya's resignation, elected **Ranil Wickremesinghe** as President on 20 July 2022, in a move opposed by the public and political factions, who termed him an unpopular unelected leader. Wickremesinghe vowed to stabilize the country, restructure its economy, and implement reforms with an aim at meeting IMF conditions. Since he assumed the presidency, he has had to face a dual challenge-public anger and economic cum political chaos of the country.
One of the first things Wickremesinghe did after assuming power was to aggressively push through negotiations with the IMF for approval of a $2.9 billion bailout package in March 2023. All these changes were in line with the requirements set by the IMF program, which, for Sri Lanka to enact a number of reforms, included increasing taxes and reducing public sector spending, among other things, like restructuring state-owned enterprises. These are some of the austerity measures taken as a result of increased public discontent.
Political Stabilization and Power Play - 2023-2024
A year after 2023, the political temperature of the country continues to remain at an all-time high with mass protests against the Wickremesinghe government over the IMF-induced austerity measures, inflation, and shortages that persisted in the early months of recovery. His government has walked a tightrope between maintaining political stability and executing economic reforms.
Hence, efforts towards restructuring the high levels of external debt continued via negotiations with the major creditors, like India, China, and Japan. From the second half of 2023, though inflation started to decline, civic discontent persisted due to corruption and misgovernance.
Under his presidency, an attempt has been made to amend the constitution and clip some of the powers considered excessive for one executive, which many argue drove the unstopped governance of the Rajapaksa family. While such moves happen, critics say meaningful progress has stalled due to Wickremesinghe's political alliance with members of the previous regime.
Geopolitical Rebalancing (2022–2024)
The fall of Sri Lanka's economy also influenced its foreign relations, especially in dependence on China and India. As one may recall, China had been the main financier in most of these infrastructure projects, such as the Hambantota Port. India, however, played a very important role during the period of crisis, opening up emergency credit lines for fuel, medicine, and food supplies.
While it has had skillfully to balance the scale between the two regional powers, weighing Chinese loans against Indian support, safekeeping the country's strategic value in the Indian Ocean amidst a growing global focus on the region.
Challenges Ahead
In 2024, Sri Lanka is slowly fighting its economic war, but the country still remains fragile for want of political stability. The Wickremesinghe government had faced criticism for the austerity measures issue, slow pace toward reform, and unchanging grip of entrenched political elites. Early elections or leadership challenges could not be completely ruled out in Sri Lanka, where Wickremesinghe's UNP holds a minimum number of seats in Parliament and thus relies on coalition support.
In spite of all these obstacles, there is an increasing focus on reconstructing the economy, reducing corruption, and resolving long-standing grievances such as ethnic reconciliation, which was left unresolved even after the civil war ended in 2009.
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