Mass protests lead to potential resignation of President and PM; official letters yet to be handed over
The largest protest in Sri Lanka to date was seen yesterday (9th July), following months of public calls for the President’s resignation. This was followed by a Party leaders meeting, where the final outcome was that both the President and Prime Minister should immediately resign, making way for an All-Party Government.
While both the President and PM have indicated that they will resign, no formal resignation process has taken place yet (although the President has informed that he will hand over his resignation on the 13th of July while the PM is yet to indicate a date of resignation).
Political uncertainty is at its peak at this point. A potential resignation of the President and PM paves the way for an all-party government which is accepted by the majority of Sri Lankans and the International community. While this could lead to improved political stability, we see the need for a strong coalition government at this point being a key factor to reducing uncertainty.
What happens next?
If both the President and PM resign, this will result in the Speaker of the House, Mahinda Yapa Abeywardena, to become acting President for a maximum of 1-month, while Parliament elects a new President for the remainder of President Rajapaksa’s term (2024/2025). During this period, a coalition government will be formed.
We note that some of the key drawbacks to a coalition government are 1) delays to decision making due to varying definition of key priorities and 2) lack of willingness to take the politically unpopular reforms which are a key priority for IMF discussions and debt restructuring. With a requirement of approx. USD 5.0bn for the next 6 months to bridge the shortage of essentials, we see continued pressure on the economy despite a potential all-party government.
Impact on IMF discussions and debt restructuring
Despite protests extending over the past months, IMF discussions have continued, where the third round of Staff level discussions are currently ongoing. A crucial factor for uninterrupted negotiations is that there needs to be an acting Finance minister and Cabinet in place. We also note that any further political uncertainty will lead to prolonged delays in debt restructuring talks, with creditors not in favor of any further instability in policy making. However, on the flipside, a strong coalition government which shows its willingness to continue with the fiscal reforms will lead to a more positive outlook for both restructuring and refinancing discussions.
In reality, with a leadership vacuum and no official resignation of either the President of PM who also holds the Finance portfolio, we expect delays in the crucial IMF discussions, where we initially expected a Staff Level Agreement by July/August.
Any prolonged uncertainty into the formation of a new cabinet will also lead to delays in the upcoming interim budget which was expected in August.
All in all, we view the potential resignation of the president as a positive to breaking the months long political deadlock. However, we reiterate our view that Sri Lanka is at a critical juncture at this point and how the political environment unfolds over the next few weeks will be critical to the road ahead on IMF discussion and economic reforms.