Sri Lanka Begins IMF Talks in Washington

Welcome to today’s Morning Brief, where we’re looking at Sri Lanka’s economic and political crises, the latest from Ukraine, and the world this week.

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Sri Lankan officials sit down with International Monetary Fund (IMF) negotiators today for a week of talks designed to stabilize the country’s ailing economy following weeks of protests that have severely tested the rule of Sri Lankan President Gotabaya Rajapaksa and his brother Prime Minister Mahinda Rajapaksa. If these negotiations end in an agreement, it will be the 17th IMF program Sri Lanka has entered into since its independence in 1948.

Although the IMF meeting was precipitated when Sri Lanka defaulted on its debt payments last week, the roots of its economic troubles reach back much further. A foreign debt load that has more than doubled in the last decade, from roughly $25 billion in 2011 to more than $56 billion today, has helped destroy the economy as steep interest payments take precedence over providing basic goods and services.

Poorly timed and questionable policies, such as tax cuts in 2019 and a botched plan to make the country’s agricultural industry fully organic, have not helped Sri Lanka balance its books, and the twin shocks of the coronavirus pandemic and war in Ukraine (higher fuel prices mean fewer Russian tourists) have all conspired to send the country’s economic trajectory downward.

Civil unrest has gripped the country since March, with thousands of protesters—fed up with food, medicine, and fuel shortages as well as steep inflation—taking to the streets to demand the resignation of the Rajapaksa government.

The protests have stood out for their broad appeal, briefly uniting a country that only ended its civil war in 2009 and where religious tensions have risen since an Islamic State attack in 2019.

“It’s pretty diverse: different people, different age groups, different ethnic groups, different linguistic groups,” Amita Arudpragasam, an independent policy analyst based in Sri Lanka’s capital, Colombo, told Foreign Policy. “They’ve been out there now for over eight days. It’s not something that is a one-time thing.” (Arudpragasam correctly predicted a coming Sri Lankan economic crisis in a 2019 FP piece).

Shanta Devarajan, a former World Bank chief economist and currently a professor at Georgetown University, will represent Sri Lanka during the week’s negotiations and has repeatedly called for cash transfers to the poor to replace any fuel and food subsidies the IMF wants to cut. “This is a very dangerous situation. And if you want to introduce austerity in the middle of that situation, you have to manage it very carefully,” Devarajan told CNBC.

“You have to do two things,” Devarajan added. “One, make sure that the poor are protected—the bottom 40 percent of the population—[through a] targeted cash transfer. Two, have a public information campaign so that people understand that these measures are needed to avoid an even bigger crisis.”

Even if they haven’t gone as far as protesters want, the demonstrations have already had an impact. At the beginning of the month, the cabinet resigned en masse while the opposition alliance has given the president and prime minister until Wednesday to resign or face a no-confidence vote in Parliament.

While the country is often held up as an example of China’s debt diplomacy, the blame can’t be laid squarely at Beijing’s door. Japan holds the same level of Sri Lankan debt as China, about 10 percent, while nearly half of its foreign debtors are private lenders.

And while the Rajapaksa brothers’ rule has been criticized for tilting too closely to China, their government’s search for immediate support has also included outreach to India. Both countries are currently being courted for funding support, with Colombo hoping for a $1.5 billion credit line from New Delhi (on top of the $1 billion already committed by India this year) and negotiating with Beijing for up to $2.5 billion in credit lines and loans.

As FP columnist C. Raja Mohan writes, both India and the United States will be eager for Sri Lanka to take the IMF’s funding so China can’t swoop in in its place. The alignment is part of a “pendulum swing” in the wider region, Mohan writes, with Washington’s focus on Nepal, the Maldives, and Bangladesh dovetailing with “New Delhi’s eagerness to prevent the region from slipping into China’s orbit.”

In an in-depth review of Sri Lanka’s IMF relationship to date, Sri Lanka-based analyst Daniel Alphonsus argues for structural reforms to the country’s political foundations—moving taxation powers away from the presidency and into parliament, for example. Ultimately, the country must begin to learn from its mistakes at the ballot box as much as the ones on its balance sheet, Alphonsus writes: “If we continue to elect fools, knaves and charlatans then no amount of cunning policy or courageous protest will deliver us from this quagmire.”

The IMF and World Bank’s spring meetings begin in Washington.

Tuesday, April 19: U.S. Secretary of State Antony Blinken heads to Panama to co-host a conference on migration.

The IMF launches its biannual World Economic Outlook report.

East Timor holds its presidential election runoff between former President José Ramos-Horta and incumbent President Francisco Guterres.

Russian President Vladimir Putin hosts Armenian Prime Minister Nikol Pashinyan in Moscow.

Wednesday, April 20: French President Emmanuel Macron and presidential runoff challenger Marine Le Pen face off in a televised debate.

Finland’s parliament debates whether to join NATO.

Thursday, April 21: British Prime Minister Boris Johnson travels to India for a two-day visit.

Sunday, April 24: France holds its presidential election runoff.

Slovenia holds parliamentary elections.

Mariupol’s last stand. Ukrainian forces have vowed to fight on in the strategic port city of Mariupol, defying a Russian order to surrender by Sunday. It may amount to a last stand, as Russian forces claim to have “cleared” the city “completely.” Ukrainian Foreign Minister Dmytro Kuleba appeared to prepare for the worst in an interview with CBS News on Sunday. Kuleba said the situation was “dire militarily and heartbreaking” and that the city “doesn’t exist anymore.”