Stabilise Sri Lanka

News: The situation is rapidly approaching a major humanitarian crisis in Sri Lanka with its Prime Minister Ranil Wickremesinghe recently stating that Sri Lanka’s economy has completely collapsed.

How bad is the situation?

Sri Lanka’s PM has informed parliament that the economy was facing a far more serious situation beyond mere shortages of fuel, gas, electricity and food. 

Sri Lanka suspended payment on $12 billion of foreign debt last month and needs $6 billion in the next few months just to keep going — to replenish reserves and pay for imported fuel and food.

At least one of its foreign creditors has already filed a suit in the US as a response to the Sri Lankan government’s decision to suspend payments.

What steps has India taken and what more it needs to do?

India will need to take the lead in stabilising its southern neighbour if it is not to have to deal with a humanitarian and political crisis with possible spillover effects.

Efforts made by India

– A team of high-level officials from New Delhi, including the finance secretary, the foreign secretary, and the chief economic advisor, have travelled to Colombo to discuss possible assistance.

– The Indian government has already provided credit lines, currency swaps, and other assistance, which total $3 billion.

Way forward

The Lankan government hopes for an official agreement to be signed with the IMF next month. The IMF will need to provide $3 billion or so in actual commitments. This agreement will not be easy, since the multilateral organization will require other major lenders to Sri Lanka to enter into various debt forgiveness and restructuring mechanisms.

One of the priorities here must be to create a structure to deal with debt to China in crisis-hit countries. This can serve as a template for such problems in the future.

– Already Laos, which owes about half its public debt to China, is being identified as Asia’s next possible defaulting country.

Domestic reforms: Much action will have to be domestic, with internal structural reform that stabilizes the currency and ensures that the island economy’s fundamentals, can lead to sustained growth.

But the outside world, led by India, must assist in this process by means of helping guarantee stability through what will be a painful transition.

Mr Wickremesinghe has warned the country may “hit rock bottom”. The rest of the world must prevent that from happening.

Source: This post is based on the article “Stabilise Sri Lanka” published in Business Standard on 23rd June 22.