Crisis in Sri Lankan economy

Neeraj Singh Manhas
This economic disaster is the result of Sri Lanka’s decades-long economic growth model. Despite its transformation into a middle-income country, Sri Lanka has been unable to attract considerable amounts of Foreign Direct Investment (FDI) due to the country’s continuous civil war and political instability. It continued to sustain its economic growth by borrowing through sovereign bonds and international bilateral commercial loans, generally at high interest rates and short payback periods, forcing the government to spend its income and foreign reserves on repaying the loans and sustaining itself through further borrowing. This external debt had grown to $35.3 billion by 2020.
Sri Lanka had previously sought economic assistance from China, India, and the IMF. However, the present government wishes to avoid the IMF and has sought aid from India and China for currency swaps, as well as from China for syndicated loans/Foreign Currency Terms Facilities.
However, as the crisis worsens, Sri Lanka will gravitate closer to China for a variety of reasons. Specifically, China has supplied and will continue to offer massive loans and dollar swap facilities to Sri Lanka. These syndicated loans will also be prioritised by the former because they are disbursed without conditions and will help the country’s much needed foreign reserves. In comparison to China, India, on the other hand, has not only fallen short in lending to Sri Lanka, but has also refused to prolong the currency exchange deal with the latter.
Similarly, although Indian investments encourage social development, China’s significant projects and investments, such as Colombo Port City and Hambantota Port, enhance much-needed FDIs and profits. As a result, China has become a tourist destination.
These advantages for Sri Lanka, however, are not free of the Chinese debt trap. As a result, India has no choice but to discourage Sri Lanka from fully embracing China. The crisis presents a chance for India to push Sri Lanka to recognise and act on Indian national interests/sensitivities.
In addition to traditional loan and financial aid, India can deploy goodwill policies/relief measures to put pressure on Sri Lanka. The Sri Lankan government is primarily concerned with increasing export revenues and foreign reserves through import prohibitions. India, being one of the biggest importers of Sri Lankan goods, with 70% of its imports directed through an FTA, has the potential to significantly increase the former’s revenue and forex reserves. Thus, India can take advantage of this chance to propose time-limited incentives for Sri Lankan imports in order to pressure the latter to align and behave in accordance with Indian national interests.
Second, the import prohibition on non-essential commodities has affected India’s and China’s exports. However, India’s export of edibles and necessities gives it a competitive advantage over China’s exports . This allows India to ship humanitarian food supplies and vital goods to Sri Lanka on concessions for a limited time. It can also utilise this show of goodwill to convince Sri Lanka to be more sensitive to Indian interests and concerns.
As a result, the current economic crisis presents a chance for India to demonstrate its goodwill in Sri Lanka and simultaneously nudge the state to respect Indian interests and sensitivities. While Sri Lanka’s interests and objectives may be aligned with a better engagement with China, it is India’s responsibility to begin engaging and negotiating with Sri Lanka regarding the situation. And the longer India waits to address this situation, the more opportunities Sri Lanka will have to make concessions and negotiate with others, including China.
The Covid-19 pandemic has caused a global slowdown, with production plummeting and supply lines affected all over the world. As global food prices have risen, countries such as Sri Lanka have bore the brunt of the impact due to their need on imports to survive. The pandemic has had a negative impact on the tourism sector, which generates the most revenue for the island nation. As a result, the Sri Lankan rupee has depreciated, putting additional strain on the country’s foreign exchange reserves.
The other issue for Colombo is one in which China has taken a significant role. The Rajapaksa government’s attempt to draw too close to Beijing has resulted in decisions in which China has been the sole beneficiary. Sri Lankan interests have been harmed, and the conflict has only become worse.
After a Chinese company, Qingdao Seawin Biotech Co Ltd, supplied tainted organic fertilisers, which resulted in the order being cancelled, it was India that had to bail out Sri Lanka with fertilisers. While the Chinese company denied the charges, Colombo claimed that the samples were contaminated with Erwinia, a lethal bacteria that kills crops, and refused to allow a ship carrying 20,000 tonnes of organic fertiliser from China to unload the cargo. To hasten the availability of fertiliser to Sri Lankan farmers, New Delhi dispatched two IAF C-17 Globemaster planes carrying 100,000 kg of Nano Nitrogen. An enraged Beijing, on the other hand, blacklisted the People’s Bank of Sri Lanka for failing to make a payment due to a ban imposed by a local court.
Chinese investments in different infrastructure projects in Sri Lanka as part of the contentious Belt and Road Initiative (BRI) have been a thorny issue for the island nation. More broadly, Sri Lanka’s economic reliance on China has resulted in an unusual debt-ridden relationship in which increasing debt due to extensive borrowing from China has rendered the future of a once flourishing economy quite bleak. The majority of major projects funded by China have had a negative impact on Sri Lanka’s future. Chinese investments in different infrastructure projects in Sri Lanka as part of the contentious Belt and Road Initiative (BRI) have been a thorny issue for the island nation. As part of a USD 1.2 billion debt exchange, the much-touted Hambantota port had to be given over to a state-run Chinese corporation in 2017 for a 99-year lease.
Despite this, the Sri Lankan government has awarded the contract to the state-owned China Harbour Engineering Company to expand Colombo Port’s eastern cargo terminal. Not only was this done following the collapse of the tripartite deal with India and Japan to create this port, but there has also been speculation in certain sectors that this project under China may wind up having a similar conclusion as Hambantota. Sri Lanka has too much debt and a minimal chance of commercial success!
The difficulty for Sri Lanka and India is to be realistic in their assessment of this crucial bilateral relationship. Both New Delhi and Colombo are vital to one another. However, India must stop viewing every step made by Sri Lanka through the lens of China. Colombo may be a strategic outpost for Beijing to outmanoeuvre India, but for New Delhi, it is about long-term, sustainable engagement with a neighbour. It may be tempting for Colombo to play the China card against India in order to obtain concessions. However, it need a strategic perspective in its interactions with both New Delhi and Beijing. Expecting India to bail out Colombo every time there is a crisis may work for a while, but it is a formula for catastrophe for both ordinary Sri Lankans and Delhi-Colombo ties.
(The author is Director, Indo-Pacific Raisina House, New Delhi, India)