The Sri Lanka situation remains fluid. With President Gotabaya Rajapaksa losing his parliamentary majority on Tuesday, the emergency ordinance invoked on 1 April this year has been revoked. Former allies and opposition members are urging the President to step down so that a joint coalition can come to power to steer the island nation through one of the worst economic crises, which is now fast turning into a humanitarian crisis of gigantic proportions.
The nation has seen the spiralling cost of essential items, which has pushed most products beyond the reach of the common man and sparked street protests that have turned violent over the past week. The government had to post armed forces at fuel pumps to restore some modicum of order. Colombo is seeing empty petrol pumps, long power cuts and long queues for food. The world fears that this crisis is going to only intensify over time and result in mass starvation due to hyperinflation.
Sri Lanka's Monumental Public Debt
On the sovereign front, Sri Lanka has run out of foreign reserves to pay its lenders, with just about $2 billion left in the treasury; only half of it is available to pay existing lenders. By all estimates, this is far too low as the country needs to pay around $7 billion this year to its lenders. And more than half that amount has to go to the International Monetary Fund (IMF).
The immediate trigger of the crisis was the forced lockdown due to the pandemic that impacted tourism. As it is, the economy was already impacted by the Easter bombings. Some monumental errors, such as banning the import of chemical fertilizers and forcing farmers to use organic fertilizers, had devastating consequences, with food production falling by 75%.
But the origin of the problem is not recent. The nation has seen public debt grow at an unprecedented pace over the last decade with no repayment plan in place. The debt figure today stands at 135% of the GDP.
India Needs to Be More Active to Counter China
The growing influence of the Rajapaksa family in the public sphere was cemented in the wake of the Easter bombings, when Gotabaya Rajapaksa won the popular mandate. The ensuing government had five members of the Rajapaksa family in key positions, and it is their monumental incompetence that has pushed Sri Lanka to the brink. The disastrous tax cuts had already weakened the government’s financial position, long before the COVID-19 pandemic struck.
The President refused to approach the IMF for aid when the situation was still in control. Now, of course, with little recourse left, Sri Lanka is looking to work out an arrangement with the IMF in the coming days even as key officials have walked out of the government.
India has been closely watching the crisis unfolding in Sri Lanka. The island nation, which has a long history of Tamil insurgency, is of strategic importance to India. New Delhi has for over three years trying to control the growing Chinese influence in the region. During Mahinda Rajapaksa’s tenure, cheap Chinese credit bought legitimacy for the government and helped strengthen his presidency. This included a $1.35-billion deal to construct the coal-fired Lakvijaya Power Plant in Puttalam and the Hambantota Port.
However, when Sri Lanka struggled with repayments, not only did it lose the Hambantota Port but it also had to hand over 15,000 acres to China. The port has the potential to give China the ability to project power in the Indian Ocean, and thus in India’s vicinity.
The present crisis has seen China put out a credit line of $1.5 billion as well as loan another billion dollars to Colombo. India has given humanitarian aid of $1 billion for food, medicine and other essential items. But this may not be enough. India needs to step in more aggressively to contain the possibility of Sri Lanka firming up its China alignment due to the escalating financial crisis. This can have long-term strategic and military consequences.
Rebuilding the Economy
The other area of concern for India is the possibility of a resurgence in Tamil insurgency, which had otherwise been brought under control. The economic crisis has the potential to resurrect dissidence, and that would be a headache that India would not want at this stage or in the future.
From an economic perspective, too, the Indian government is rightly worried. Sri Lanka is a major trans-shipment hub for Indian cargo handling. Indian goods have been lying at the Sri Lankan ports for days as the unavailability of labour and fuel has brought port administrations to a virtual standstill.
However, India has been forthright in helping Sri Lanka. The visit of the External Affairs Minister of India towards the end of March this year after the crisis had erupted was not only a reassuring gesture after the announcement of the line of credit, but it also gave confidence to many sections of the population in Sri Lanka that India was genuinely trying to help them.
As the dialogue continues even in this situation, Indian involvement will be keenly observed in that nation. Support for the tourism and tea industries could be very useful for both countries to set in motion the rebuilding of the economy.
The coming days are critical for Sri Lanka as the government strives to stop a complete collapse of law and order in the country due to the unavailability of essential items. But given its importance in the Indian subcontinent, India, too, has to take steps to help Sri Lanka dodge a humanitarian crisis of gargantuan proportions and keep China from adding Sri Lanka to its axis.
(Subimal Bhattacharjee is a commentator on cyber and security issues around northeast India. He can be reached @subimal on Twitter. This is an opinion piece and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)
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