Lessons from Lanka’s crisis
Unbridled borrowing and Covid-19 caused it. But it is an opportunity to boost bilateral ties
After decades, refugees fleeing Sri Lanka are once again arriving on the shores of India, this time triggered by what is possibly the island nation’s worst economic crisis. There are reports of severe shortages of food and fuel, the country’s foreign exchange reserves fell to just $2.3 billion last month with debt payments for the rest of the year pegged at $4 billion, and the government of President Gotabaya Rajapaksa struggling to pay for imports of essential commodities. Foreign exchange reserves were also hit because of Covid-19. The government’s tax cuts and switch to organic agriculture further squeezed revenues and increased pressure on the indebted economy. The crisis was in the making for almost a decade, largely due to the country’s excessive dependence of imports and borrowings for a raft of massive infrastructure projects. Sri Lanka’s external debt stands at $45 billion, including about $8 billion owed to China, and outstanding international sovereign bonds worth $12.55 billion. There have been protests against the government, which has been forced to turn to India and China for bailouts.
The crisis has come at a time when there has been an improvement in bilateral relations, especially after the containment of the fallout of Sri Lanka’s decision last year to scrap a trilateral agreement with India and Japan for the development of a terminal at the strategic Colombo port. Sri Lanka’s finance minister Basil Rajapaksa has worked closely with his Indian counterpart Nirmala Sitharaman and external affairs minister S Jaishankar to fashion an aid package for the island country. India has so far extended assistance worth $2.4 billion, including a recent $1 billion concessional loan for food and medicines and Prime Minister Narendra Modi has pledged to stand by Sri Lanka. This assistance is a perfect example of how India’s “Neighbourhood First” policy can benefit the region.
The crisis highlights how unbridled borrowing for big-ticket projects, such as those under China’s Belt and Road Initiative, can lead to complications for smaller countries that have signed on for Beijing’s flagship project. The crisis, however, could also be an opportunity for India and Sri Lanka to firm up plans for beneficial integration of their economic and energy sectors to ensure long-term stability.