The New Year looks decidedly gloomy in India’s political neighbourhood

Source: The post is based on the article “The New Year looks decidedly gloomy in India’s political neighbourhood” published in the Business Standard on 3rd January 2023.

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

Relevance: About challenges in India’s political neighbourhood.

News: Three key Indian neighbourhood countries with which India has economic ties — Sri Lanka, Bangladesh and Nepal — are facing risks that appear to be worsening.

What are the risks associated with India’s political neighbourhood?

Sri Lanka: Its economic crisis needs International Monetary Fund (IMF) loans – a combination of the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF).

But for that, Sri Lanka will have to reach a deal with its bilateral creditors, principally, India, Japan and China that the terms of their loans do not work at cross purposes with the IMF loan.

Bangladesh: It also having economic trouble. The collapse of global trade, on which the economy is acutely dependent, and high oil prices have hit the economy hard. There is a “sharp widening of the current account deficit, the rapid decline of foreign exchange reserves, rising inflation and slowing growth” in Bangladesh.

Due to these, the country has just signed a 42-month arrangement to secure a $3.2-billion IMF loan under ECF and EFF, with another $1.3 billion under the climate-linked Resilience and Sustainability Facility (RSF).

Nepal: The general elections had led to no clear verdict. Recently, the country finally got a new government in place with a left-wing orientation. The previous government’s repair work was made necessary by the IMF loan. The current inflation rate of 8.08%.

Pakistan: Standard & Poor recently reduced the sovereign rating to CCC-plus. This puts it deep in junk grade.

The supply shock-led crisis in South Asia highlights the policy missteps of different governments. The growth of South Asia now depends on how the countries implement the IMF support programmes.