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Context:
Sri Lanka is facing an economic crisis with long queues in front of petrol stations, steep rise in prices of essential commodities and frequent blackouts.
Sri Lanka is in the throes of the worst economic crisis it has seen in decades, collapsing under the weight of its debt.
Although the COVID-19 pandemic precipitated a crisis of trade imbalance, the fundamentals of the Sri Lankan economy have always had serious issues.
Debt, both domestic and foreign, has been a major problem.
Even in February 2020, hardly a few months after Gotabaya Rajapaksa assumed office as President during his visit to New Delhi, wanted India to reschedule the loan.
Over the last three months, India has provided assistance of $2.4 billion including a $500 million loan deferment and $1 billion credit line to enable the supply of essential commodities.
What is happening in Sri Lanka?
- The island’s foreign reserves have hit rock bottom, with commercial banks unable to secure dollars to finance imports of food, fuel and medicines.
- Sri Lanka was in a deep economic crisis when the Covid-19 pandemic hit, reducing foreign worker remittances and crippling the lucrative tourism sector — a key source of dollars for the economy.
- The government imposed a broad import ban in March 2020 to save foreign currency.
- The shortages pushed food prices up 25 per cent last month, with overall inflation at 17.5 per cent — the fifth consecutive monthly record high.
- Sri Lanka is also facing five-hour rolling electricity blackouts as thermal generators have run out of fuel.
- Three international rating agencies have downgraded the island since late last year, on fears it may not be able to service its $51 billion sovereign debt.
- The International Monetary Fund (IMF) in an analysis, pointed out that the country’s “debt overhang,” along with persistent fiscal and balance-of-payments shortfalls, “will constrain growth and jeopardise macroeconomic stability in both the near and medium term”.
- “Based on staff analysis, the fiscal consolidation necessary to bring debt down to safe levels would require excessive adjustment over the coming years, pointing to a clear solvency problem,” the IMF said.
India aiding the food and energy security to Sri Lanka’s economic crisis:
- Recently, India and Sri Lanka agreed to a four-pronged approach to discuss initiatives on food and energy security to help mitigate Sri Lanka’s economic crisis.
- Earlier in 2021, Sri Lanka declared an economic emergency amid rising food prices, a depreciating currency, and rapidly depleting forex reserves.
- The country’s heavy dependence on imports for essential goods like sugar, pharmaceuticals, fuel, pulses and cereals worsened the crisis.
- The government’s ban on chemical fertilizers last April as it looked to become the first country to fully adopt organic farming backfired.
- A survey showed that 90% of Sri Lanka’s farmers used chemical fertilisers for cultivation.
- The move led to a drastic drop in domestic food production, pushing up food prices.
- The decision was rolled back after months of mass protests by farmers but the damage was done.
- Food inflation soared to 25.7% in February. The crisis is now starting to impact Indian exporters.
- Thousands of containers sent from India to Sri Lanka, including for its own consumption as well as trans-shipment cargo, have been lying uncleared at Colombo port as authorities can’t afford to transfer containers between terminals.
- This, in turn, has led to some build-up of cargo intended for Sri Lanka at Indian ports. India also relies considerably on Colombo port for global trade given it is a transhipment hub.
- 60% of India’s trans-shipment cargo is handled by the port. India-linked cargo, in turn, accounts for 70% of the port’s total trans-shipment volume.
Tamil Nadu: Feeling the impact of the crisis:
Perhaps, Tamil Nadu has already started feeling the impact of the crisis with the reported arrival of 16 persons from Sri Lanka, including six women and seven children, through illegal means.
Tamil Nadu was home to nearly three lakh refugees after the anti-Tamil pogrom of 1983.
Regardless of the motive of those who have reached Tamil Nadu clandestinely, the authorities, both in India and Sri Lanka, should ensure that the present crisis is not used to step up smuggling activities and trafficking or whip up emotions in both countries.
Mr. Gotabaya Rajapaksa should also use the scheduled meeting with the Tamil political leadership to create a road map on the issue of political devolution and economic development of the war-affected northern and eastern provinces, among the areas badly hit by the current crisis.
What do experts say?
- Some experts believe Sri Lanka should restructure its debt and establish a three-year repayment structure.
- Doing so would save precious dollars and lessen the burden on Sri Lankan citizens who are facing shortages of imported goods such as milk powder, gas and fuel.
- Sri Lanka is unreasonably committed to repaying its debt. It is more prudent to press pause on debt repayment and take care of critical economic needs.
- Fitch estimates the Sri Lankan central bank will also need to arrange for $2.4 billion to help state-owned and private firms in the country honour the debt obligations they have in 2022, over and above the $4.5 billion central government debt.
- The country also needs around $20 billion for essential imports such as fuel, food and intermediate goods for exports.
- Reserves have been at a critical level for months but grew to $3.1 billion at the end of December boosted by a $1.5 billion yuan currency swap from China.
Conclusion:
The crisis should be used as an opportunity for New Delhi and Colombo to thrash out a solution to the Palk Bay fisheries dispute, a longstanding irritant in bilateral ties.
There is a need to step up our people-centric developmental activities while scrupulously staying clear of any interference in Colombo’s domestic affairs.
Nurturing the Neighbourhood First policy with Sri Lanka is important for India to preserve its strategic interests in the Indian Ocean region.
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