Ahead of Sri Lanka's presidential election, no issue is more central than the economy.
As the South Asian country still struggles to emerge from its worst financial crisis in decades, Saturday's vote amounts to a referendum on austerity measures imposed by the International Monetary Fund (IMF) last year.
In a crowded field of 38 candidates, all eyes are on three men: incumbent President Ranil Wickremesinghe and his two closest rivals, Anura Kumara Dissanayake and Sajith Premadasa, who both want a new deal with the Washington, DC-based lender.
Wickremesinghe, a six-time prime minister, represents the old guard.
His United National Party (UNP) has been one of Sri Lanka's dominant political forces since the country's independence in 1948.
While Wickremesinghe's supporters praise his $2.9 billion IMF loan (and subsequent debt restructuring deals), Sri Lankans experienced a cost-of-living crisis under his watch, with inflation peaking at nearly 74 percent in 2022.
Following the end of its civil war in 2009, Sri Lanka borrowed heavily to finance infrastructure-led growth.
In 2019, President Gotabaya Rajapaksa introduced unfunded tax cuts. Fiscal pressures were exacerbated when the COVID-19 pandemic brought tourism and remittance flows to a standstill.
In 2022, a sudden spike in oil prices and interest rates in the United States plunged Sri Lanka into a balance of payments crisis. To maintain imports, Colombo was forced to shore up its depreciating currency, the rupee, depleting its meager international reserves.
The Rajapaksa government was faced with an increasingly difficult choice: continue to service its international debt or pay for critical imports such as food, fuel and medicine. In April 2022, Sri Lanka defaulted on $51 billion of external debt.
In July, as the country faced shortages of basic goods and power outages, inflation was hovering around 60 percent. Anger at the government’s handling of the crisis sparked mass protests on the streets, forcing Rajapaksa to flee the country and resign.
As Rajapaksa's successor, Wickremesinghe was tasked with reversing Sri Lanka's economic crisis.
Facing a shortage of options, it turned to the IMF. In March 2023, Colombo agreed to a 48-month emergency loan. As with all IMF deals, strict conditions were attached.
In exchange for the funds, Wickremesinghe was forced to eliminate electricity subsidies and double the value-added tax (VAT) rate.
“Wide-ranging austerity also included a restructuring of sovereign debt,” Katrina Ell, director of economic research at Moody's Analytics, told Al Jazeera.
Refinancing operations typically involve exchanging old debt instruments for new, more affordable ones. Sri Lanka's domestic and foreign lenders had to accept losses equivalent to 30% as part of the IMF deal.
“All these measures do not offer a quick fix,” Ell said.
Still, “Sri Lanka’s economy has shown significant signs of improvement” since 2022, he said.
The rupee has stabilised and inflation has come down sharply from its 2022 peak. The World Bank expects the economy to expand 2.2 per cent in 2024, after two consecutive years of negative growth.
Real wages are still well below pre-crisis levels and the country's poverty rate has doubled, according to the World Bank.
Presidential candidate Premadasa, whose Samagi Jana Balawegaya (SJB) party split from Wickremesinghe's UNP in 2020, has criticised the IMF deal.
Premadasa has argued that boosting export markets and strengthening the rule of law are the way forward.
But it is not a prime candidate for change, according to Jayati Ghosh, an economics professor at the University of Massachusetts Amherst.
“That mantle falls on Anura,” Ghosh told Al Jazeera.
Dissanayake's political standing has risen dramatically in recent months.
Although his far-left Janatha Vimukthi Peramuna (JVP) party won only three seats in the last parliament, it has since changed its image to project a more conventional picture.
Today, the JVP represents a coalition of left-wing groups, and while it receives strong support from younger voters, those over 50 still remember the JVP's attempted insurrections in the late 1980s, a period of terror in southern Sri Lanka that resulted in between 60,000 and 100,000 deaths.
“Dissanayake has distanced himself from his party’s past and its former Marxist leanings,” Ghosh said. “And though he has moved a little closer to the centre, he remains the progressive in the race.”
Dissanayake has pledged to raise Sri Lanka's income tax-free threshold and exempt some health and food items from the 18 percent value-added tax to make them more affordable.
“Anura wants to change the Fund's insistence on treating external and domestic debt equally,” Ghosh said.
“In addition to the regressive VAT increases, public pension funds bore the brunt of the restructuring. Teachers and nurses saw their pensions cut. It is criminal,” he added.
“Dissanayake would try to pressure the IMF to shift the burden from ordinary Sri Lankans to external creditors. The livelihoods of the poor have already been badly affected. He has been much more critical of the debt issue than Premadasa.”
Following a $4.2 billion debt restructuring with China's Ex-Im Bank in October, Sri Lanka completed a $5.8 billion restructuring with several countries, including India and Japan, in June.
In a last-minute deal ahead of elections, the country on Thursday closed a deal with private investors to restructure $12.5 billion in international bonds, clearing the way for the release of its fourth tranche of IMF bailout funds.
But according to Sri Lankan economist Ahilan Kadirgamar, “it is too creditor-friendly.”
“In theory, restructuring operations are meant to reduce debt costs and free up public resources for things like education and healthcare. That is not what is happening in Sri Lanka,” Kadirgamar told Al Jazeera.
Sri Lanka’s debt-to-GDP (gross domestic product) ratio is expected to fall from 128% of GDP in 2022 to just over 100% in 2028, according to IMF forecasts. Debt-servicing costs (the percentage of tax revenues needed to pay creditors) will also remain high.
“Recent financing arrangements were tied to the IMF’s 2023 debt sustainability analysis, which was flawed,” Kadirgamar said. “It did not provide sufficient debt relief and requires debt to be repaid through high budget surpluses, meaning lower spending on public services.”
Sri Lanka's fiscal balance moved from a deficit of 3.7 percent of GDP in 2022 to a surplus of 0.6 percent in 2023.
“This was partly due to lower spending on infrastructure projects… which may well result in lower growth, worsening future debt dynamics,” Kadirgamar said.
Sri Lanka's fiscal position is also hampered by a low tax base.
According to the World Bank, tax collection as a percentage of GDP is typically between 15 and 20 percent in low- and middle-income countries. In Sri Lanka, it is around 8 percent, one of the lowest rates in the world.
Kadirgamar said “years of liberal free-market policies” and the “disastrous 2019 budget” had undermined fiscal stability.
“Whoever wins the election should focus on revising the IMF agreement and introducing a wealth tax,” he said.
Kadirgamar said the country also remains overly dependent on imports.
“I think we should develop industries linked to Sri Lanka's natural resources,” he said, pointing to the country's “enormous ocean resources” including seafood and offshore wind energy.
Elsewhere, investing in Sri Lanka’s coconut and dairy industries could “expand the rural tax net and reduce foreign exchange restrictions,” Kadirgamar said.
“Sri Lanka’s recovery is still fragile. Trying to modify the terms of the IMF package may cause problems in the short term,” he added.
“But if the current trajectory continues, I fear Sri Lanka will default again in the future. It is time to put our house in order.”
