Dealing with Sri Lanka

News: Sri Lanka is facing a debt crisis and it has asked for assistance from China.  

Sri Lanka is facing a debt crisis due to various factors, such as;  

1. Fitch Ratings has downgraded Sri Lanka’s debt to the leveljust above default.  
2. Country’sforeign debt had reached 42.6 per cent of gross domestic product. It has to pay off almost $5 billion in debt before October.  
3. ForeignCurrency reserve of Sri Lanka has reduced from $8 billion before the pandemic to a low of $1.2 billion. It has to ban the import of certain items to preserve Foreign Currency.  
4. High Inflation (11%), along with restriction on imports has led to shortage offooditems. 

Why Sri Lanka has turned to China for assistance? 

First, Closeness of Sri Lankan President Rajapaksa family with China.  

Second, China is fourth largest external creditor of Sri Lanka. 

Third, People’s Bank of China’s $1.5-billion currency swap deal helped Sri Lanka in preserving its Foreign Exchange reserves.  

Fourth, it is notable that the Hambantota port was famously handed over on a 99-year lease to a Chinese firm in 2017 under the debt restructuring agreement. However, China has shown sensitivity to the criticisms of its foreign infrastructure financing as a “debt-trap diplomacy”. So, Sri Lanka is expecting debt restructuring from China over its $1.5 billion debt, which is due this year.   

Why India has not been asked for help? 

On the other hand, India has not acted with the required speed and scale.  For example, the RBI last year renewed a mere $400 million swap line to Sri Lanka, in comparison to its repeated request for at least a $1 billion swap line. 

Delaying the request for assistance is likely to push Sri Lanka towards China, which has been more responsive with lesser efforts.     

Source: This post is created based on the article “Dealing with Sri Lanka” published in Business Standard on 11th Jan 2022.