A renewed Sri Lankan engagement

Source: The post is based on the article “A renewed Sri Lankan engagement” published in “Business standard” on 18th October 2023.

Syllabus: GS2- International relation- India and its neighbourhood- relations.

News: Sri Lanka faced a big economic crisis. India helped a lot, giving money and resources. Many Sri Lankans now feel positive towards India. Tourism in Sri Lanka is improving, with many tourists from India. Colombo port is growing, handling lots of India-related cargo. India’s influence is rising while China’s is decreasing.

How severe is Sri Lanka’s economic crisis?

Economic Decline: Sri Lanka’s economy reduced by 8% in 2022 and is forecasted to shrink further by 3.5-4% this year.

IMF Support: The IMF has extended a package, with a $330 million tranche already disbursed.

Affordability Issue: Essential supplies like food and fuel are available in Colombo, but their high prices make them unaffordable for the poorer sections, exacerbated by decreased incomes.

Rising Unemployment: The nation has witnessed a loss of half a million jobs in the past three years due to the economic downturn.

Increase in Poverty: Over 4 million people have been pushed below the poverty line since the crisis began, a considerable number out of a population of 21 million.

How has India helped?

Financial Aid: In 2022, India provided Sri Lanka with total assistance of about $4 billion.

Petroleum Support: A crucial $500 million line of credit was extended by India to supply petroleum products, mitigating a severe fuel shortage in Sri Lanka.

Currency Swap: The Reserve Bank of India facilitated a currency swap of $400 million with the Central Bank of Sri Lanka.

Essential Supplies: India offered another $1 billion credit facility, assisting Sri Lanka in procuring urgent necessities such as food, medicines, fuel, and industrial raw materials.

Debt Relief: Payments amounting to around $2 billion that Sri Lanka owed to India under the Asian Clearing Union were deferred.

Agricultural Boost: To revive agricultural production, India provided a $50 million line of credit for Sri Lanka to procure fertilizers.

How has trade between India and Sri Lanka evolved?

Historical Milestone: In 2000, Sri Lanka became the first South Asian country to sign a free trade agreement with India.

Trade Expansion: As a result, bilateral trade jumped from around $600 million at that time to a significant $6.2 billion today.

Further Collaboration: This trade success opened doors to more ambitious plans, leading to discussions about an Economic and Technology Cooperation agreement.

Barriers to Progress: Despite the potential benefits of this agreement, it has not been finalized. Opposition stems from certain political and business groups in Sri Lanka who express concerns over potential Indian economic dominance.

Renewed Negotiations: The talks about the proposed agreement, which were halted for five years, resumed last month, suggesting a renewed optimism in finalizing it in the improved atmosphere of bilateral ties.

What’s the future outlook?

Tourism’s Revival: Tourism is on a recovery path, with Indian tourists at the forefront. There were 1,23,000 arrivals from India in 2022, and over 200,000 by September this year.

Enhanced Connectivity: A ferry service was recently inaugurated between Sri Lanka’s Kankesanthurai and Tamil Nadu’s Nagapattinam, likely boosting tourist numbers further.

Trade Prospects: Talks have resumed on the proposed Economic and Technology Cooperation agreement, indicating a brighter future for trade relations between India and Sri Lanka.

Colombo’s Port Potential: The port facilities in Colombo, significant for India-related cargo, are expanding, promising a modern and efficient future for the port.

Indian Investments: Indian entities, like ITC and Indian Oil, are undertaking major projects in Sri Lanka, reflecting confidence in its economic resurgence.