Dr. Gulbin Sultana, Research Analyst, South Asia Centre, Manohar Parrikar Institute for Defence Studies and Analyses, spoke on “Economic Crisis in Sri Lanka: An Assessment” at the Monday Morning Webinar held on 14 February 2022. The Webinar was moderated by Dr. Anand Kumar, Associate Fellow, South Asia Centre. The Director General, Ambassador Sujan R. Chinoy, Deputy Director General, Maj. Gen. (Dr.) Bipin Bakshi and other scholars of the Institute participated in the Webinar.

Executive Summary

The focus of the webinar was on the ongoing economic crisis in Sri Lanka and the efforts initiated by the government to deal with the crisis. The reasons for the forex reserves crisis in Sri Lanka due to the global pandemic and debt servicing commitments of the government were discussed. The Webinar also dealt with the impact of the crisis on tourism, exports and remittances.  External assistance, India’s role in mitigating the crisis and its impact on India-Sri Lanka relations was also discussed.

Detailed Report

Introducing the topic, Dr. Anand Kumar pointed out that the pandemic has created a financial crisis for a large number of countries, especially in small Island nations in South Asia like Sri Lanka and the Maldives. He informed that both these countries are heavily dependent on the tourism sector and added that Sri Lanka faced a decline both in terms of proceeds from tourism and foreign remittances, and now it is facing a serious shortage of foreign exchange. The tourism industry that contributes more than ten percent to the nation’s Gross Domestic Product was badly hit and there was a cascading effect. He added that Sri Lanka is also under heavy foreign debt and there are fears that the country could go bankrupt this year. The economic crisis in Sri Lanka is deepening and the country appears to be staring at a “humanitarian crisis”.

Dr. Gulbin Sultana, pointed out that the present economic crisis was largely due to the depletion in the forex reserves since September 2020. But the crisis became worse when in November 2021, there was a sharp decline in forex reserves. Pointing out that Sri Lanka is an import-dependent country both for essential and non-essential commodities, she held that the importers were finding it difficult to get letters of credit issued in the banks to settle their import payments. Due to the shortage of fuel in the country, many power plants in the country have had to be kept shut for many days which has created a severe power crisis in Sri Lanka. The pandemic has mainly impacted the tourism, export and remittance sector. The number of tourist arrivals dropped drastically adversely impacting the revenue generated due to tourism.  During the beginning of the pandemic in 2020, adequate foreign currency was not coming into the country but a huge amount was going out of the country as the government had to settle the debt, and on top of it, the government had to pay for its daily requirements. 

According to the current government in Sri Lanka, there are inherent problems in the economy because all the previous governments have spent more money than they have earned. So the government is trying to reduce expenditure. Import restrictions on some non-essential items have also been introduced by the government. There is a ban on chemical fertilizers in the country and there is a sudden change from chemical fertilizers to organic farming, which is likely to have a disastrous impact on agricultural production.  There is already a huge protest in the country against this ban. Enlisting the other measures the government has taken to deal with the crisis, she said that the government is relying on bilateral partners, particularly for loans and currency swap facilities while also working out ways to boost investors’ confidence and attract external investment.  Interestingly, the government is not ready for any IMF bailout fearing conditions, which will be difficult for the government to meet, even though experts, economists and even the opposition in the country are suggesting that it approaches the IMF. The government is looking for homegrown solutions not taking into consideration the declining economic situation, according to the opposition and economists. What the country needs now is a long-term, low-interest bail-out, as this crisis is likely to continue for at least the next two years.

Talking about foreign assistance to help the Sri Lankan Government weather the current crisis, the speaker informed the audience that India has committed US$ 2.4 billion and China has extended a US $1.5 billion swap facility. Negotiations are on with China for a fresh loan to repay the Chinese debt. However, so far, there is no commitment from the Chinese side to this effect. There has been an interesting development in Sri Lanka-Bangladesh relations as Bangladesh has committed a US$200 million swap facility which has increased the forex reserve. Reportedly, Pakistan has also agreed to extend a US$200 million loan for the purchase of rice and cement. Negotiations are on with Qatar to facilitate a US $ 1 billion currency swap facility.

Dwelling on India’s assistance to Sri Lanka, the speaker said that India and Sri Lanka signed a four-point package of cooperation in December 2021 which includes, a US$ 1billion credit line to import food and medicine, a line of credit of $500 million for fuel import from India, deferral of two months on Sri Lanka’s dues to the Asian Clearing Union, worth $500 million, and a US$ 400 million swap facility. There are talks about increasing Indian investment in Sri Lanka under the four-point package. Whenever there is a crisis in Sri Lanka, India has always stepped in and this time too, India has extended help, putting aside the strains in India-Sri Lanka relations in 2020-21 following the cancellation of the East Container Terminal Project (ECT). The recent signing of the MoUs on the Trincomalee Oil farm project suggests that relations are back on track.

Despite these positive developments, there are still concerns in India about Sri Lankan behaviour. Sri Lanka has tried to address India’s concerns only when the former has been in crisis, to gain favour from India, but as soon as the crisis is over, it takes India for granted. Indian policymakers must be alive to these issues so as to avoid any unpleasant situation in bilateral relations in the future. 

Discussion

The Director General, Ambassador Sujan R. Chinoy pointed out that the pandemic has no doubt affected Sri Lanka, more than India, perhaps, given the nature of its economy which depends a great deal on tourism. The tourism industry in Sri Lanka ground to a halt and the expatriate workers who came back home badly impacted the remittance sector. Because China has a zero-COVID policy, the movement of people from China was restricted. As a result, Chinese outbound tourism is virtually nonexistent right now. This provides an opportunity for India to try and replace the undue reliance of Sri Lanka on Chinese tourists. It is inevitable that smaller neighbors will continue to have an element of discomfort in terms of dependence on the Indian economy as it is counterproductive for them. 

The Deputy Director, Maj. Gen. (Dr.) Bipin Bakshi, while referring to the speaker’s concluding observation that Sri Lanka looks towards India only in times of crisis, underlined the points of apprehension of the Island nation towards India in the past. He mentioned that India-Sri Lanka had a very strong security and defense relationship but once the Indian Peace Keeping Force (IPKF) pulled out, they always felt that India has not done enough in those years to stem the LTTE. The latest economic crisis in Sri Lanka was mostly averted by the Chinese bail-out, India has also helped but it is not publicized much. He stressed that India’s capability to execute projects well needs to be looked into in order to address the issue of Sri Lanka’s dependence on China. 

Dr. Smruti S. Pattanaik, Research Fellow observed that India is a factor in Sri Lanka’s domestic politics, especially because of persisting relevance of issues concerning Tamil politics. Since Sinhala-Buddhists are in a majority, the government tries to pander to their sentiments. Moreover, since the end of the war in 2009, the government has been promoting a Sinhala-Buddhist nationalist agenda. She pointed out that India has always argued for the implementation of the 13th Amendment to the Sri Lankan constitution. In fact, when the Sri Lankan Government made attempts to repeal it, India’s Foreign Secretary visited Sri Lanka to convey India’s stand on the issue. She underlined that the approach of the Sri Lankan government to the Tamil issue would continue to be an important factor in India-Sri Lanka relations. In spite of India’s help to Sri Lanka in dealing with the economic crisis, Sri Lanka’s approach to India would be determined by domestic politics.

Talking about Sri Lanka’s approach towards Indian investment, she added that it has always been political. For example, it scrapped the MoU on East ECT terming ECT as a national asset but now Chinese companies are engaged in the same project. This same approach is visible in the project on Trincomalee Oil tanks. Moreover, those business houses and trade unions that have protested against India’s investment in ECT or against the Comprehensive Economic Partnership Agreement (CEPA) and Economic and Technology Cooperation Agreement (ETCA) are close to the ruling regime.  She added that India’s economic engagement has always been politicised in Sri Lanka. She argued that it will be difficult for Sri Lanka to expand its market and increase its exports because its top export destinations are the US and EU and both these countries have hardened their stance on human rights issues. There has been an attempt not to extend the Generalized System of Preferences to Sri Lanka to put pressure on Sri Lanka on the human rights issue.

During the Q&A, responding to various queries from the participants the speaker observed that there is hope that the situation will improve once COVID conditions improve but she underlined that it was important to understand that Sri Lanka had a debt-service commitment amounting to US$25 during 2021-2025. There is a need to take a proactive approach so the inflow of money does not create further debt. She also emphasised that loan re-structuring will not resolve the issue, but it will give Sri Lanka breathing space at a moment when there is depletion in forex reserves. Talking about US-Sri Lanka relations, the speaker pointed out that India-Sri Lanka relations at the moment were better than US-Sri Lanka relations. Sri Lanka refused to take the Millennium cooperation grant from the US, and ultimately the US canceled the grant. Sri Lanka is also not ready to go to the IMF for a bail-out and it only seeks technical assistance from IMF. Talking about the European Union (EU), the speaker pointed out that the EU is the biggest market for Sri Lankan products but there is a lot of pressure from the EU on Sri Lanka over the human rights issue. 

The report has been prepared by Dr. Zainab Akhter, RA.