Sri Lanka’s divisive Rajapaksa clan consolidated its grip on power on Thursday as the newly elected President swore in his brother as prime minister amid concerns they could roll back vital economic reforms.
Global credit rating agency Fitch chose that day to warn that the new president’s pledges to increase social spending, public-sector wages and pensions could jeopardize Sri Lanka’s public finances.
Rival Moody’s Investor Service echoed those sentiments saying the new government was likely to pursue a more expansionary fiscal policy, particularly given campaign promises of tax cuts, increased subsidies and greater public sector employment opportunities.
But another international rating agency, S&P Global, said the election results would result in easing political uncertainty and producing greater clarity of policy. And international markets acknowledged improved prospects.
“Rajapaksa’s election victory does remove a large part of the political uncertainty weighing on the sovereign. This, coupled with still attractive valuations, leads us to remain overweight on the Sri Lanka complex, particularly the longer-dated bonds given the relatively steep 5s/10s curve,” said Nomura analyst NIcholas Yap in a report referring to the global bonds issued by the Sri Lanka government.
The International Monetary Fund said earlier this month that Sri Lanka’s economy was slowly recovering from the impact of the Easter Sunday suicide bombings that crippled the booming tourism sector.
Growth was likely to accelerate to 3.5 percent next year from this year’s forecast of 2.7 percent, the Washington-based lender said in early November, compared with 3.2 percent in 2018.
During Mahinda’s 2005-15 presidency, Sri Lanka borrowed almost $7 billion for infrastructure projects – many of which turned into white elephants mired in corruption, pushing up Sri Lanka’s debts.
Earlier this month, the IMF released the latest tranche of a $1.5 billion bailout that was suspended in October 2018 during a constitutional crisis last year.
Fitch said that coupled with expected bond issues this should ease near-term concerns about Sri Lanka’s debts.
“But external debt repayments are substantial at $19 billion in 2020-2023 against reserves of $7.8 billion,” Fitch said.
It said that any rollback of economic reforms of the previous government could have implications for Colombo’s relations with the IMF.
Sri Lanka’s Central Bank rejected the report.
“The contents of the statement issued by Fitch Ratings, which are purely based on loose assumptions, cannot be endorsed,” the Central Bank of Sri Lanka said in a statement.
The new president said Friday that he will call a snap parliamentary election in March following his sweeping victory at the weekend.
Gotabaya Rajapaksa is hoping to ride a wave of popularity by calling an election six months before the current parliament’s five-year term expires on March 1.
“I will consult the people at the earliest opportunity I get under the constitution,” he said, after swearing-in a new cabinet headed by his brother Mahinda, a former president who will now serve as premier and finance minister.
The brothers are credited with brutally defeating Tamil separatist militants in 2009 to end Sri Lanka’s bloody civil war, making them adored among the majority Sinhalese-Buddhist majority.
For the same reason they are feared by many Tamils, and also among the Muslim minority who have seen increased hostility since Islamist extremist attacks killed 269 people in April.
Currently the Rajapaksas and their allies have just 96 lawmakers in the 225-seat parliament, making it hard for them to pass legislation.
The opposition of outgoing premier Ranil Wickremesinghe is also six MPs short of a majority.
The new 16-member cabinet also includes another Rajapaksa brother, Chamal, who was made minister of agriculture and irrigation in addition to trade.
Foreign affairs was given to Dinsesh Gunawardena, 70, a leader of a small Sinhala nationalist party in coalition with the ruling party.
The only female in the cabinet, Pavitra Wanniarachchi, will take on women’s affairs and health.
Nobody was named to the defense or law and order portfolios.
Mahinda, the elder and more charismatic of the brothers, was unable to run for president, having already served the maximum of two terms between 2005 and 2015 – clearing the way for his sibling.
– With reporting by AFP