Foreign Policy Watch: India-Sri Lanka

Sri Lanka’s aggravating Economic Crisis


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Economic crisis in Sri Lanka

Sri Lanka’s economic crisis is aggravating rapidly, putting citizens through enormous hardship.

Reasons for the Crisis

The first wave of the pandemic in 2020 offered early and sure signs of distress.

  • In-migration: Thousands of Sri Lankan labourers in West Asian countries were left stranded and returned jobless.
  • Shut-down: Garment factories and tea estates could not function, as infections raged in clusters. Tourism sector to saw a big dip.
  • Domestic job losses: Thousands of youth lost their jobs in cities as establishments abruptly sacked them or shut down.
  • Forex decline: It meant that all key foreign exchange earning sectors, such as exports and remittances, along with tourism, were brutally hit.

Policy failures of Lankan govt

  • No strategy: The lack of a comprehensive strategy to respond to the crisis then was coupled with certain policy decisions last year.
  • Ill-advised policies: It included the government’s abrupt switch to organic farming —widely deemed “ill-advised”, further aggravated the problem.
  • Food hoarding: The government declared emergency regulations for the distribution of essential food items. It put wide import restrictions to save dollars which in turn led to consequent market irregularities and reported hoarding.
  • Continuous borrowing: Fears of a sovereign default rose by the end of 2021, with the country’s foreign reserves plummeting to $1.6 billion, and deadlines for repaying external loans looming.

What is happening on the ground?

  • At the macro-economic level, all indicators are worrisome.
  • The Sri Lankan rupee, which authorities floated this month, has fallen to nearly 265 against the U.S. dollar. Consumer Price inflation is at 16.8% and foreign reserves stood at $2.31 billion at the end of February.
  • Sri Lanka must repay foreign debt totalling nearly $7 billion this year and continue importing essentials from its dwindling dollar account.
  • Sri Lanka will incur an import bill of $22 billion this year, resulting in a trade deficit of $10 billion.

Implications on Public

  • For citizens, this means long waits in queues for fuel, a shortage of cooking gas, contending with prolonged power cuts in many localities and struggles to find medicines for patients.
  • In families of working people, the crisis is translating to cutting down on milk for children, eating fewer meals, or going to bed hungry.

How is India helping?

  • Acting in the Neighbourhood’s first policy, India stands with Sri Lanka.
  • $1 billion credit line signed for supply of essential commodities. Key element of the package of support extended by India.
  • Beginning January 2022, India has extended assistance totalling $ 2.4 billion — including an $400 million RBI currency swap and a $500 million loan deferment.

Chinese lure of aid

  • China is considering Sri Lanka’s recent request for further $2.5 billion assistance, in addition to the $2.8 billion Beijing has extended since the outbreak of the pandemic.

How is India’s assistance being viewed in Sri Lanka?

  • Sacking key infra projects: The leadership has thanked India for the timely assistance, but there is growing scepticism in Sri Lankan media and some sections, over Indian assistance “being tied” to New Delhi inking key infrastructure projects.
  • Deep incursion: They mainly include the strategic Trincomalee Oil Tank Farm project; the National Thermal Power Corporation’s recent agreement with Ceylon Electricity Board to set up a solar power plant in Sampur, with investment from India’s Adani Group.
  • Diplomatic blackmail: SL media accuses New Delhi was resorting to “diplomatic blackmail”. The political opposition has accused the Adani Group of entering Sri Lanka through the “back door”, avoiding competitive bids and due process.

Options available for SL

  • Sri Lanka is hoping for a Rapid Finance Instrument (RFI) facility as well as a larger Extended Fund Facility (EFF) from the IMF to deal with its foreign currency shortages.
  • IMF had assured to help the country with an amount of $300 million to $600 million.

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