The government of President Maithripala Sirisena is struggling to reconcile the conflicting demands of its electoral promises and the terms of the lending agreement reached with the IMF last June, as a mushrooming fiscal deficit and soaring national debt raised the specter of a credit crisis. Support from the IMF is conditioned on the implementation of austerity measures, an obligation that has made the president and the fragile governing coalition headed by Ranil Wickremesinghe increasingly vulnerable.
For now, the majority status of the partnership of the SLFP and Wickremesinghe’s UNP creates a basis for smooth policy implementation, a point underscored by the ease with which the administration secured parliamentary approval of its budget for 2017. The spending plan includes tax reforms, including a hike in the VAT from 11% to 15%, that are projected to boost revenues from taxes to 13.5% of GDP, up from 11.6% of GDP last year. The government is aiming to narrow the deficit to 4.6% of GDP in 2017, from more than 7% of GDP last year, and the additional income generated by the higher VAT rate and changes to corporate and withholding taxes should put the target within reach.
Sirisena scored an upset victory over Mahinda Rajapaksa at a presidential election held in January 2015 on the strength of his promises to bring economic prosperity, root out corruption, and deliver constitutional reforms that would reverse the concentration of political power in the presidency and produce a European-style parliamentary system. Two years later, the prospects for making good on those pledges have dimmed considerably. Indeed, the government has lost ground in the battle against corruption, and there have also been setbacks in the area of constitutional reform that raise doubts about the viability of the partnership of the UNP and the SLFP, which is based in no small part on Wickremesinghe’s assumption that he would take control of the levers of power under a reformed governance structure.
The SLFP has also rejected a proposal of the Tamil National Alliance to merge the northern and eastern Tamil-majority regions of the country as part of a devolution plan. The alienation of the minority Tamil population would create a risk of negative attention from the UN, which has granted the unity government significant leeway on the matter of addressing war crimes allegations dating back to the closing weeks of the country’s long civil war. The Rajapaksa government’s refusal to permit an independent investigation into the charges resulted in Sri Lanka’s international isolation, and the current regime could face a similar situation if the UN decides that its confidence in the good faith of the Sirisena administration was unfounded.