Event

President Sirisena (Sri Lanka Freedom Party - SLFP) has called snap legislative elections by next January 2019 and dissolved the Parliament. This acceleration in political developments comes amid a fresh political crisis that has been triggered by the President’s earlier decision to oust his PM Wickremesinghe (United National Party – UNP) and replace him by opposition leader and former president Mr. Rajapakse (Sri Lanka Podujana Peramuna – SLPP). This move is very controversial given the potential lawlessness for the President to dissolve the Parliament less than 4.5 years after its first session (a rule resulting from the President’s constitutionally weakened power), and to call elections without the legally required 2/3 Parliamentary majority Mr. Rajapakse seemingly failed to obtain. President Sirisena justified his change of PM by an alleged assassination plot against him. However, the constitutional crisis could have just begun after the Supreme Court suspended the dissolution measure until December after having heard complaints filed by the UNP and several other parties. If legislative elections are held shortly, Mr. Rajapakse, who enjoys a large support among Sinhalese nationalist Buddhists and largely won last February’s local elections, would be the favourite. Meanwhile, political tensions are expected to remain high amid protests and possible violent clashes between the two PM’s sides, namely Mr. Wickremesinghe’s – which is refusing to leave the PM official residence - and Rajapakse’s. An undetermined period of instability has started.

Impact

Sri Lanka’s descent into constitutional crisis is the inevitable outcome of an intrinsically unstable cohabitation between Mr. Sirisena and Mr. Wickremesinghe that came out from the 2015 presidential elections. Their divergent views on multiple policies – particularly economic - eventually overrode their wish to keep Mr. Rajapakse out of power. In a weak position in Parliament, President Sirisena has thus – possibly illegally - opted to return to his once political partner who is expected to give him a majority in Parliament after the elections. Mr. Rajapakse’s contentious strong figure and the way he might return to the government are likely to raise political tensions and violence in the country in the one-year outlook, especially around the next elections. This return to the past strongman, this time as a PM, would be worrying and could deteriorate relations with the international community and donors, particularly as the stalled reconciliation process with the Tamil minority is frozen, and Mr. Rajapakse’s pro-Sinhalese stance could further fuel ethnic tensions (especially with the Muslim community) which led to a state of emergency earlier this year.

The political crisis occurs at a time of adverse economic context. External pressures have been rising on Sri Lanka’s economy marked by disappointing growth performances. This is illustrated by the decline of the rupee, which is among the worst performing Asian currencies this year.

The continuing depreciation is happening on the back of a widening current account deficit. As in the rest of South Asia, the Sri Lankan economy is indeed suffering from a heavier imported oil bill. Moreover, consequences of the tighter US monetary policy, namely a stronger USD and rising interest rates, will negatively hit the economy by putting external debt servicing under higher stress. The situation could worsen under a new government led by Mr. Rajapakse. His government would be badly perceived by investors which remember his populist and authoritarian policies and fiscal slippages during his presidential rule in 2005-2015. His future policies could therefore deepen the country’s economic woes, particularly on the fiscal side by hindering the ongoing fiscal consolidation under the current IMF programme. With low government revenues and one of the highest public debts (79% of GDP in 2017) in Asia, public finances are indeed the country’s weakest economic link. Also, in light of his past mandate and debt-fuelling infrastructure projects, Mr. Rajapakse might favour a foreign policy rebalancing towards China notably as far as investments are concerned. Faced with a negative risk outlook, Credendo’s ratings will be under pressure next year, starting with the commercial risk. The latter is likely to be downgraded from B to C (on an A to C scale, A being the lowest risk) as a result of the depreciation of the Sri Lankan rupee which is expected to continue in 2019 and be exacerbated by the political crisis.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com