Sri Lanka’s economic crisis

“Deepening debt crisis in SL strokes crisis over Chinese lending” – Livemint – 19^th Jan 22.

Economic emergency: Sri Lanka’s key foreign exchange earners, tourists and remittances from abroad, were hit hard by the pandemic. So, it declared an economic emergency in the state because of decade-high inflation, weak currency and high imports.

According to Fitch, currency foreign reserves were depleted to $1.6bn, enough to cover less than a month of imports.

Also, Rating firms like Moody, Fitch and standard have also downgraded the country’s sovereign credit score into the junk category.

It does not have sufficient reserves to import essential products like fuel, medicine etc.

High Inflation (11%), along with restriction on imports has led to shortage of food items.

Further, the Easter killings of 2019 has hit the country’s tourism industry.

An overnight switch to organic farming by government which has threatened Sri Lanka’s main export, the paddy and tea.

“Friend in need: On India-Sri Lanka ties” – The Hindu – 17th Jan 22

Sri Lankan economy is in big crisis with a credit crunch, a slump in GDP, foreign reserves that reduced from $7.5 billion in 2019 to $1.6 billion in 2021 and pending debt repayments of more than $7 billion.

Given these conditions, the Sri Lankan president has to make a tough decision in the coming weeks, whether to service debts to bonds with an instalment of $500 million or leave it to default for the first time ever.

“Deepening debt crisis in SL strokes crisis over Chinese lending” – Livemint – 19^th Jan 22.

According to Sri Lankan Central bank data, as of the end of 2020, Sri Lanka has about $3.5bn in debt from China excluding loans from state enterprises. In which, about 36% of its debt is owed through international sovereign bonds. Sri Lankan government was also unable to repay the loan for the Hambantota Port which was built by Chin and so gave it on a 99-year lease to it.

Sri Lanka accused China to push it into a debt trap to expand China’s sphere of political influence and use Sri Lanka to achieve the ambition of becoming the world power at the cost of the lives of innocent people. It requested China to restructure its debt, provide concessional trade terms and lift Covid related restrictions on Chinese tourists visiting Sri Lanka.

How India can make use of the opportunity in its favour?

The crisis has opened opportunities which India cashed in by providing $500 mn. It was the first major tranche of $4.5 bn of sovereign debt repayments in 2022. Both countries are also in talks of Indian loans totalling $1.5 bn for essential commodities, fuel, food and medicine.

“Dealing with Sri Lanka” – Business Standard – 11^th Jan 22

Why Sri Lanka turned to China for assistance?

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

Second, China is 4^th 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.

“Friend in need: On India-Sri Lanka ties” – The Hindu – 17th Jan 22

-India decided on a “four-pronged” initiative” which includes Lines of Credit towards the import of fuel, food and medicines, currency swap and debt deferrals from India to Sri Lanka.

– MOU has been signed on the Trincomalee project after a decade of delays.

– India has extended $400 million under the “SAARC currency swap” arrangement.

– India agreed to a partial deferral of a $500 million settlement from Sri Lanka by two months.

– The $1.5 bn LoC for essential imports is in process.

India finalises cooperation plan to revive Covid-hit Sri Lanka economy” & “Four-pronged plan on Sri Lanka crisis” published in Indian Express and The Hindu on 4^th Dec 2021.

Four-pronged package

1). Urgent food and health security package that includes an extension of a line of credit to cover the import of food, medicines and other essential items from India to Sri Lanka

2). Energy security package that includes a line of credit to cover the import of fuel from India, and early modernisation of the Trincomalee Tank Farm;

3). Offer of a currency swap to help Sri Lanka address its balance of payment issues;

4). Facilitation of Indian investments in different sectors that would contribute to growth and expand employment.