Economic distress in Sri Lanka: Life & Debt – India-France-Japan initiative crucial for Colombo

Source: The post is based on the article “Lanka: Life & Debt – India-France-Japan initiative crucial for Colombo” published in The Times of India on 15th April 2023.

Syllabus: GS – 2: India and its neighbourhood- relations.

Relevance: About economic distress in Sri Lanka.

News: Recently, Sri Lanka received a $2. 9 billion package from IMF. Following that, India, Japan and France have set up a common platform for talks among Sri Lanka’s creditors to work out ways to restructure the country’s external debt.

About the present state of economic distress in Sri Lanka

Sri Lanka’s average inflation in 2023 is projected to be 28. 5% even as the economy is expected to shrink 3.1%. But, Sri Lanka’s current account deficit in 2023 is projected to be 1. 6% of GDP, a manageable level.

The greatest distress of the Sri Lankan economy at present is its aggregate external debt, which is 74% of its GDP. Sri Lanka is having arrears to almost all of its external creditors. The country has also obtained financing assurances from all major creditors.

Note: China is the major creditor of Sri Lanka. 

What led to the economic distress in Sri Lanka?

What are the objectives of the economic restructuring package for Sri Lanka?

The key aim of Lanka’s economic restructuring package is to lower its annual debt service in foreign exchange from the current 9% of GDP to 4. 5% by 2027. This will require the country to lower its public debt from the current level of 122% of GDP.