Dr. Arvind Kumar*
Sri Lanka, an island nation inhabited by 22 million people with having tourism-based economy is currently in the throes of a worsening economic crisis of unprecedented nature since its independence. Public frustration has been soaring high amid sudden shortages in fuel, cooking gas, and essential food items, worsening inflation, currency devaluation, and rolling power cuts in recent weeks. Having become desperate in the wake of the rising cost of living and confronting difficulties in obtaining basic items, the people of Sri Lanka had been left with no other option but to stage protests on the streets.
In the aftermath of a demonstration outside the official residence of the Sri Lankan president on March 31, the Government declared a state of emergency and promulgated a curfew on April 2 along with shutting down social media networks. Frequent reports of excessive and unwarranted police violence against protestors have been pouring into the international media.
The Scale of the Economic Crisis
Some experts are of the view that the economic crisis has been brewing in Sri Lanka for many years, primarily due to mismanagement of the economy and non-governance. In order to fund public services, the Sri Lanka government resorted to borrowing huge sums of money from foreign lenders in the preceding decade, and this borrowing spree coincided with a series of severe blows to the Sri Lankan economy, from both nature-induced disasters like heavy monsoons – to human-induced catastrophes, including a ban on chemical fertilisers imposed by the government that literally destroyed farmers’ harvests.
Dismissal of the Sri Lankan prime minister by the president in 2018, apart from compounding the prevalent problems, triggered a constitutional crisis, and the brutal killing of hundreds of people at churches and luxury hotels in the 2019 Easter bombing was another tragic event that added fuel to the already simmering discontent, and rest of the contribution was made by the onset of the Covid-19 pandemic from 2020 onwards. Attempt on the part of the Sri Lankan government to slash taxes in the wake of the huge deficit not only proved futile but rather hit government revenue.
Left with no other option but to fall back on its foreign exchange reserves to pay off government debt also proved a wrong step undertaken by the government of Sri Lanka because it culminated in the shrinking of its foreign exchange reserves from $6.9 billion in 2018 to $ 2.2 billion in 2022, and the resultant outcome is discernible on the impact of imports of fuels and other essentials leading to an unprecedented spike in prices. With a view to eliciting loan from the International Monetary Fund (IMF), and garnering remittances by devaluing its currency, the Sri Lanka government in March this year floated the Sri Lankan rupee in the open market so that its price could be determined on the basis of demand and supply of foreign exchange markets; nevertheless, the move of the Sri Lanka government of plunging the rupee against the US dollar failed to attain the desired objective, rather it worsened the plight of ordinary Sri Lankans.
The ongoing economic crisis in Sri Lanka has assumed political overtones as well. There is growing disenchantment of people with the ruling Rajapaksa family, whose members hold several top positions in government, including President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa. In the face of public ire, the cabinet of ministers resigned in full on April 4, and the new finance minister appointed on April 5, also resigned. However, the Rajapaksa government has failed to come up to the expectations of the people in this hour of crisis. Thus, Sri Lanka can be said to be in a severe grip of economic and political crisis.
India lends Helping Hand
India has lent a helping hand to Sri Lanka in this hour of crisis by providing financial support and supply of food, medicine, and petroleum products. Some experts opine that India’s goodwill gestures in Sri Lanka’s hour of crisis afford an opportunity for India to repair and restore traditional friendly relations. During the presidency of Mahinda Rajapaksa (2005-2015), relations between New Delhi and Colombo turned sour owing to President Mahinda Rajapaksa’s leanings toward Beijing and his usage of Chinese credit to buy himself domestic legitimacy and consolidate his grip over the reins of power. This period saw Sri Lanka moving into the Chinese orbit and firming up a series of agreements between the two countries, including a $ 1.35 billion deal to construct the coal-fired Lakyijaya Power plant and the controversial Hambantota Port.
The inability of the Sri Lankan government to repay Chinese loans in time culminated in Hambantota Port along with more than 15, 000 acres of land being handed over to China on a 99-year lease. India’s apprehensions of China making strategic military use of this Port for the projection of China’s naval prowess in the Indian Ocean were not misplaced. Availability of facilities afforded to China by Sri Lanka was often denied to other foreign countries at the behest of Beijing. The promised allocation of the East Container Terminal of the Colombo Port to India and Japan was denied by Sri Lanka on the plea of local resistance.
China under the garb of its Belt and Road Initiative (BRI) hoodwinked the ruling elite of Colombo by conveniently financing loans and by the time repayment of these loans came the economy of Sri Lanka had already gone into shambles. What happened to Sri Lankan request to the visiting Chinese Foreign Minister Wang Yi in January 2022 to restructure debt repayment as a part of endeavours to relieve pressure on Sri Lanka’s economy is not yet known.
In recent months, India has brooked no delay in rendering assistance to crisis-ridden Sri Lanka. India has extended a $ one billion line of credit to Sri Lanka for food, medicine, and other essential items. Harsh Vardhan, India’s Foreign Secretary recently said that Sri Lanka is a core part of India’s Neighbourhood First policy that is designed to water down anti-India sentiment and foster better relationships with countries in the region.
Way Forward: Fostering close relations with its immediate neighbours, especially in South Asia and the BIMSTEC region should be the priority of India’s Neighbourhood First policy. China’s strategy of hoodwinking smaller countries of South Asia under the garb of its BRI programme is getting exposed gradually, and it is high time for India to regain its lost ground and ward off the region from Chinese threats. Developments in Sri Lanka should be a lesson for other countries that easily fall prey to Chinese tentacles.
