India’s big role in helping Sri Lanka tide over its worst-ever economic crisis

Sri Lanka has announced expense cuts including slashing its military by a third to 1,35,000 by next year to recover from its worst-ever economic crisis.

Earlier in January, the Sri Lanka government’s spokesperson and media minister, Bandula Gunawardena, said each ministry’s annual budget would be reduced by five percent. The government was “trying its best to curtail other expenses too”, he added.

Bankrupt Sri Lanka has taken several measures in the last few months to tackle the unprecedented economic crisis that triggered violent protests, leading to the ouster of the then-president Gotabaya Rajapaksa in July last year.

Meanwhile, India’s foreign minister S Jaishankar is slated to visit the island nation on January 19 to hold debt restructuring talks.

Colombo is trying to secure a $2.9 billion bailout package with the International Monetary Fund (IMF) for which it requires financial assurances from its major lenders – China, Japan and India.

India has played a significant role in helping Sri Lanka over the last year to tide over the economic crisis.

The island nation declared bankruptcy last year and defaulted on its $51 billion foreign loans for the first time since independence from Britain in 1948.

Let’s have a closer look at how India has been at the center of providing aid to crisis-hit Sri Lanka despite the island nation’s growing ties with China.

India’s much-needed leg-up

In the last year alone, India has gone above and beyond to help Sri Lanka’s collapsing economy which has led to food, fuel and even medicine shortages.

While the Wickremesinghe-led government has somewhat brought down the crunch of fuel and cooking gas, the power outages continue along with a paucity of imported medicines.

Headline inflation slightly eased in Sri Lanka in December 2022 at 57.2 percent, as compared to 61.0 percent in November. But, the island nation’s Consumer Price Inflation rate remains considerably higher than all its South Asian peers.

Graphic: Pranay Bhardwaj

In September last year, India’s Permanent Representative to the United Nations, Ruchira Kamboj, said that New Delhi has extended nearly US$4 billion in food and financial assistance to Colombo.

“In our immediate neighborhood, we are continuing to help our good friend and neighbor Sri Lanka to ensure food security by providing nearly $4 billion in food and financial assistance during the past few months,” she had said, as per ANI.

This included $1.5 billion to Colombo for imports and another $3.8 billion in the form of currency swaps and credit lines, noted South China Morning Post (SCMP).

In the past months, New Delhi has dispatched several shipments of essentials such as fuel, food and fertilizers to its neighbor.

According to a report by Sri Lankan think tank Verite Research, India surpassed China to emerge as the top bilateral lender to Colombo in 2022.

Out of the $968 million loans taken by Sri Lanka in the period of January-April, India disbursed $377 million, followed by Asian Development Bank (ADB) which lent $360 million, Outlook reported.

China takes a back seat

While India took center stage, Beijing held back in extending a helping hand to Sri Lanka despite being the island nation’s largest bilateral lender.

Beijing made it clear that it wants Lanka to pursue an “independent” foreign policy, which Deccan Herald said means to “break off from India, the IMF and the West, and hitch its wagon to China”.

China has provided only $75 million in humanitarian aid to Colombo and is currently holding debt restructuring talks with the cash-strapped nation.

Moreover, Beijing’s loans to the island nation have come to focus since the economic crisis in Lanka turned to political turmoil last year.

Opposition legislator in Sri Lanka, Shanakiyan Rasamanickam, recently hit out at China, accusing the Asian giant of stalling his country’s IMF deal and “forcing down” unnecessary projects by “paying bribes” to Sri Lankans.

“If China is truly Sri Lanka’s friend, ask the Chinese to help with it [debt] restructuring and the IMF program,” he was quoted as saying by The Hindu.

Sri Lanka needs China to see it through the current crisis. Beijing will have to play “a major role” in Colombo’s debt restructuring process, a recent paper by Sri Lankan economists Umesh Moramudali and Thilina Panduwawala said.

Out of the total amount owed by Sri Lanka to foreign governments, China’s share is 52 percent, followed by Japan’s at 19.5 percent and India’s at 12 percent.

Explained India's big role in helping Sri Lanka tide over its worst economic crisis

Graphic: Pranay Bhardwaj

Sri Lanka owes over $6 billion to China, about 10 percent of the island nation’s total external debt, as per BBC.

Referring to China-funded mega infrastructure projects in Hambantota and Colombo, Tamil National Alliance leader said, “That is not China being Sri Lanka’s friend, that is China being Mahinda Rajapaksa’s friend.”

It was during Mahinda Rajapaksa’s term as president that Sri Lanka’s ties with China were bolstered, raising concerns for India.

Under Rajapaksa, Beijing invested in the Hambantota Port, Colombo Port City and other smaller infrastructure projects in Sri Lanka.

The strategic southern port of Hambantota, inaugurated in 2011, was handed over to China on a 99-year lease in 2017.

In August last year, a Chinese research ship – Yuan Wang 5 – docked in this port causing alarm for India. New Delhi had earlier voiced concerns that the ship would be used to spy on its activities, as per BBC report.

The Diplomat noted that the huge amounts of loans extended by China to Sri Lanka over the past years are seen as one of the factors behind the island nation’s economic collapse, stoking allegations of “debt-trap diplomacy”.

Why India is on the right path

“Since the onset of Sri Lanka’s ongoing crisis, India has acted with alacrity to provide succor to the island nation,” Dr Avinandan Choudhury, an associate fellow at New Delhi’s National Maritime Foundation, wrote for The Diplomat in November 2022.

India’s prompt response to help the island nation has been hailed not only by Sri Lanka but also by other countries.

“India has played a very crucial role, especially at this critical juncture. We have gone through an immense crisis as a country, and India has come forward and supported us,” Sajith Premadasa, Sri Lanka’s main opposition leader, told BBC.

US Agency for International Development (USAID) administrator Samantha Power praised India for leading efforts to assist Sri Lanka while slamming China on the other hand for offering “opaque loan deals at higher interest rates than other lenders”.

Shakthi De Silva, a postgraduate international affairs candidate at the National University of Singapore, said the United States “conceded” the role of the first responder to India.

Explained India's big role in helping Sri Lanka tide over its worst economic crisis

Sri Lanka is undergoing its worst-ever economic crisis. AP File Photo

“These benefits [India] as it reinforces its neighborhood-first policy and renders a positive image of New Delhi among the subcontinent’s smaller nations,” De Silva told SCMP.

Neil DeVotta, political and international affairs professor at Wake Forest University in the US, told SCMP that the “worst foreign policy Sri Lanka can pursue is one that threatens India”.

DeVotta said this was the mistake of former presidents – Gotabaya and his brother Mahinda Rajapaksa, who are widely viewed as pro-China.

Experts suggest that to reduce Lanka’s dependence on China, India should expand bilateral trade with Colombo.

“As it is only in India’s interest to reduce Sri Lanka’s dependence on China, the former must contribute to closer integration of the island nation into the world economy. Here, a good place to start would be through expanding bilateral trade between New Delhi and Colombo. The India–Sri Lanka Free Trade Agreement (ISFTA), for one, can be utilized to this end,” Akash Chowdhury wrote for Observer Research Foundation in June last year.

With inputs from agencies

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