R.M. Manivannan Courtesy The Strategist

The economic and political upheavals Sri Lanka has faced in recent years, including its 2022 debt default and the mass protests that ousted former President Gotabaya Rajapaksa, serve as a stark reminder of the dangers posed by poor governance and rampant inequality.

A 2023 report by the International Monetary Fund attributes the country’s ongoing crisis to widespread corruption and fiscal mismanagement, underscoring the urgent need for the new president, Anura Kumara Dissanayake, to implement bold structural reforms aimed at restoring public trust and promoting social justice.

At the heart of Sri Lanka’s ongoing crisis is a deeply flawed institutional framework, plagued by inefficiencies and susceptible to political interference. The IMF report highlights the erosion of independent institutions such as the Public Service Commission, the National Police Commission, the Audit Service Commission, the Commission to Investigate Allegations of Bribery or Corruption (CIABOC), the Finance Commission and the Delimitation Commission, which led to the mismanagement of public resources and a chronic lack of transparency. Unless, and until, these fundamental governance issues are addressed, economic recovery will remain out of reach.

To revive Sri Lanka’s economy, Dissanayake, the leader of the left-wing National People’s Power alliance, should pursue three major reforms. First, he must strengthen institutions like the CIABOC and improve oversight of public appointments. Second, improving fiscal transparency and procurement policies could reduce inefficiencies and increase trust in public spending. Lastly, limiting government officials’ discretionary power over tax incentives would curb corruption, boost revenue and promote fiscal responsibility.

Dissanayake must also confront the deeply entrenched structural inequalities that have long impeded Sri Lanka’s GDP growth. In his 2012 book The Price of Inequality, economist Joseph E Stiglitz argues that inequality is ‘not just a moral issue, but an economic one’, with the potential to stifle growth and trigger social unrest. Sri Lanka, where rising income inequality has been a major cause of socioeconomic instability, is a prime example of this dynamic. As the IMF report suggests, corruption-fuelled financial mismanagement and opaque tax policies have deepened Sri Lanka’s income disparities.

Reducing inequality is critical for Sri Lanka’s long-term economic and political stability. Building on Stiglitz’s insights, the new administration must pursue progressive tax reforms to ensure that the burden does not fall disproportionately on lower-income households. This approach also aligns with the IMF’s call for greater transparency in tax incentives and exemptions.

Another way to reduce inequality is to invest in public goods such as education, health care and infrastructure. Sri Lanka must redirect resources from the inefficient capital investments favoured by the Rajapaksas toward projects that directly benefit underserved communities. Establishing a transparent and competitive investment process could help direct resources to where they are most needed, in line with the IMF’s recommendations.

Labor-market reforms are equally important. Sri Lanka’s economic recovery hinges on creating equitable job opportunities by guaranteeing fair wages and safe working conditions, particularly in sectors like manufacturing and services, where inequality is most pronounced.

Weak, poorly designed institutions often allow wealth to be concentrated in the hands of a few. As the IMF report reveals, the lack of independent governance structures in Sri Lanka has caused corruption and inefficiency to flourish. To reverse this trend, Dissanayake’s administration must bolster regulatory frameworks, protect independent agencies and the judiciary from political interference, and create a level playing field that provides equal opportunities to everyone.

Civil society can play a pivotal role in this transformation. As Stiglitz notes, inclusive governance holds the key to reducing inequality. The IMF report criticises the absence of platforms for public participation, emphasising the importance of citizen engagement in holding institutions accountable.

A vibrant civil society and a free press are crucial to restoring trust in the country’s institutions. But reforming Sri Lanka’s draconian and outdated security and anti-terrorism laws—remnants of the decades-long war against the Liberation Tigers of Tamil Eelam—Dissanayake could encourage greater public participation and promote accountability.

In sum, to accelerate its economic recovery, Sri Lanka must revitalise its institutions and tackle the systemic inequities that have fuelled much of its recent turmoil. Implementing the IMF’s technical recommendations would help stabilise the country’s finances, while drawing on Stiglitz’s insights could help reduce income and wealth gaps.

But long-term growth will require bold leadership. Fostering transparency, accountability, and meritocracy would help Sri Lanka build a stronger, more resilient economy, laying the groundwork for a more just, prosperous and sustainable future for all its citizens.