Sri Lanka’s economic crisis
Oct 01, 2021
Sri Lanka’s economic crisis
Q Why is it in News ?
A On 31 August 2021, Sri Lanka declared a state of economic emergency, as it is running out of foreign exchange reserves for essential imports like food.
Q How is Economic cooperation between India and Sri Lanka ?
- India is Sri Lanka’s third-largest export destination, after the US and UK.
- More than 60% of Sri Lanka’s exports enjoy the benefits of the India-Sri Lanka Free Trade Agreement, which came into effect in March 2000.
- India is also a major investor in Sri Lanka.
- Foreign direct investment (FDI) from India amounted to around $ 1.7 billion over the years from 2005 to 2019.
- Concessional financing of about $ 2 billion has been provided to Sri Lanka through various Indian government-supported Lines of Credit across sectors like railways, infrastructure and security.
- India’s development partnership with Sri Lanka has always been demand-driven, with projects covering social infrastructure like education, health, housing etc.
- The Reserve Bank of India (RBI) had signed a currency-swap agreement with the Central Bank of Sri Lanka (CBSL) under the Saarc Currency Swap Framework 2019-22.
Q What are Factors responsible for economic emergency in Sri Lanka ?
- Tourism: Tourism, a big dollar earner for Sri Lanka, has suffered since the Easter Sunday terror attacks of 2019, followed by the pandemic.
- Declining FDI: Earnings fell from $3.6 billion in 2019 to $0.7 billion in 2020, even as FDI inflows halved from $1.2 billion to $670 million over the same period.
- Debt distress: Its public debt-to-GDP ratio was at 109.7% in 2020, and its gross financing needs remain high at 18% of GDP, higher than most of its emerging economy peers.
- The external debt-to-GDP ratio stood at 62% in 2020 and is predominantly owed by its public sector.
- More than $2.7 billion of foreign currency debt will be due in the next two years.
Q How economic crisis may push Sri Lanka to align its policies with China ?
- Reliance on Chinese credit: Sri Lanka has increasingly relied on Chinese credit to address its foreign debt burden.
- Unable to service its debt, in 2017, Sri Lanka lost the unviable Hambantota port to China for a 99-year lease.
- Increasing bilateral trade: China’s exports to Sri Lanka surpassed those of India in 2020 and stood at $3.8 billion (India’s exports were $3.2 billion).
- Strategic investment by China: Owing to Sri Lanka’s strategic location at the intersection of major shipping routes, China has heavily invested in its infrastructure (estimated at $12 billion between 2006 and 2019).
- In May, Sri Lanka passed the Colombo Port City Economic Commission Act, which provides for establishing a special economic zone around the port and also a new economic commission, to be funded by China.
Q What will be Implications for India ?
- Relations between India and Sri Lanka seem to have plummeted since the beginning of this year.
- In February, Sri Lanka backed out from a tripartite partnership with India and Japan for its East Container Terminal Project at the Colombo Port, citing domestic issues.
- Sri Lanka’s economic crisis may further push it to align its policies with Beijing’s interests.
- India is already on a diplomatic tightrope with Afghanistan and Myanmar.
- Other South Asian nations like Bangladesh, Nepal and the Maldives have also been turning to China to finance large-scale infrastructure projects.
Q What can be Way forward ?
- Nurturing the Neighbourhood First policy with Sri Lanka will be important for India.
- Explore possibility through regional platforms: The BIMSTEC and the Indian Ocean Rim Association could be leveraged to foster cooperation in common areas of interest like technology-driven agriculture and marine sector, IT, renewable energy, and transport and connectivity.
- Cooperation on private sector investment: Both countries could also cooperate on enhancing private sector investments to create economic resilience.
- With its economy in deep trouble, Sri Lanka may get further pushed towards China, India has to deliver on its Neighbourhood First policy to protects itself from the adverse fallout.