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Source: The post is based on an article “Bailouts and balances: Tough choices ahead for Sri Lanka” published in Business Standard on 28th October 2022.
Syllabus: GS 2 – International Relations
Relevance: measures to improve Sri Lanka’s economic crisis
News: Sri Lanka has been witnessing food and energy shortages and political instability for a long period of time.
This has made the country to run out of the cash to survive its economy. Therefore, IMF has assisted Sri Lanka in improving its position.
How has IMF helped Sri Lanka and what are its suggestions?
Sri Lanka has finalized a staff-level agreement with the International Monetary Fund (IMF) and four-year rescue plan worth $2.9 billion has been provided by the IMF.
The IMF agreement has laid down the following conditions for the Sri Lankan government: a) a cut in spending, b) increase in taxes, c) policies against corruption, d) autonomy for the central bank, and e) reduction in debt-to-gross domestic product ratio.
It also wants that Sri Lanka should talk to its top bilateral fund creditors (China, Japan, and India) to restructure its loans, seek debt relief and financial assurances.
How has the three countries help Sri Lanka at the time of crisis?
China: China is the largest lender of Sri Lanka. It is the only lender contributing to 10 per cent of Sri Lanka’s overall borrowings and accounting for 20 per cent of its overall debts.
- China has helped Sri Lanka in many ways such as by providing financial assistance worth $2.5 billion in 2020 and by providing a $1.5-billion currency swap in 2021.
- It has also offered humanitarian assistance of $75 million and additional financial assistance worth $4 billion.
India: India’s approach to the Sri Lankan crisis is people-centric as well as interest-driven. India has assisted Sri Lanka with $3.8 billion in 2022 and Sri Lanka owes 2% of its debt to India.
- India has also provided credit lines, currency swaps, modernization, investments, and emergency humanitarian supplies to prevent the collapsing of Sri Lanka’s economy.
- Further, India has offered a free-floating dock facility, a Maritime Rescue Coordination Centre, and a Dornier reconnaissance aircraft to make Indian Ocean free of threats.
- India’s interest toward Sri Lank has made Sri Lanka to align with India and move away from China. For example, Sri Lanka has cancelled the Chinese energy projects in the Jaffna peninsula and offered India the project to modernize the strategic Trincomalee oil tank farm.
Japan: Japan is the second largest bilateral lender to Sri Lanka but it has been very cautious to respond to crisis. Sri Lanka owes 9 per cent of its debt to Japan.
- However, Japan has committed to cooperate with India to help Sri Lanka in the humanitarian crisis by providing total humanitarian assistance of $6.5 million.
- Moreover, Japan has also shown interest in defense cooperation, Sri Lankan ports and infrastructure development in Sri Lanka due to the increase in the importance of the Indo-Pacific region.
- Japan has adopted shuttle-diplomacy approach where it could coordinate or host meetings and conferences between India and China to help Sri Lanka restructure its debts.
These all show how the three countries have assisted Sri Lanka during the crisis and therefore, Sri Lanka might face challenges in debt-negotiation with these countries.
What are the challenges that Sri Lanka can face?
Sri Lanka can face challenge from China as China has expansionist interest. Thus, it will continue to pressurize Sri Lanka to abide by its interests especially trying to put Sri Lanka away from India.
Further, Sri Lanka might also face challenge to convince India if it increases its bilateral relation with China.
Japan and its shuttle-diplomacy attempt would also not serve its purpose if China refuses to restructure its loans.
Japan and India have security concerns while China has expansionist interest in Sri Lanka Therefore, Sri Lanka would have to create a balanced approach towards negotiating its debt and maintaining bilateral relations.
