Indian assistance to crisis ridden Sri Lanka

By Gulbin Sultana, PhD

A delegation of senior Government of India officials, led by Foreign Secretary Vinay Kwatra, and consisting of Secretary, Department of Economic Affairs Ajay Seth, Chief Economic Advisor Dr. V. Anantha Nageswaran, and Joint Secretary, Indian Ocean Region, Ministry of External Affairs Kartik Pande, visited Colombo on 23 June 2022 to take stock of the ground situation in Sri Lanka and exploring the areas of partnership for mutual benefits.

The visit came at a time when the country is struggling to ensure an adequate supply of food, fuel, medicines, and other essential items to meet people’s daily needs due to insufficient foreign reserves. According to the Central Bank of Sri Lanka (CBSL), the Gross official reserves stood at US$ 1.8 billion as at end of April 2022, which includes the swap facility from the People’s Bank of China equivalent to around US$ 1.5 billion, which is subject to conditionalities on the usability. As per the Chinese Swap agreement condition, Sri Lanka can use that money only if it has enough foreign reserves for three months. Unfortunately, Sri Lanka has not had sufficient foreign exchange reserves for three months since the loan was taken and thus it could not tap the Chinese swap facility. This indicates that the actual foreign reserves at the end of April 2022 probably amounted to around US$300 million only instead of US$ 1.8 billion, whereas the country requires the US$ 690 million per month to import fuel (US$ 500 million), gas (US$ 40 million) and food items (US$150) to meet the daily requirements of the people. The country is not only lacking foreign reserves but also lacking Sri Lankan Rupees. As a result, CBSL had to print rupees to pay the salaries of government employees, which in turn has caused high inflation. The country for the first time in its history has defaulted on its debt. It is also for the first time in the history of Sri Lanka that a food aid appeal has to be made for the Island’s population by the United Nations (UN). Sri Lankan Prime Minister (PM) Ranil Wickremesinghe has declared in Parliament that the debt-ridden Sri Lankan economy has completely collapsed.

The Sri Lankan Government is relying on outside assistance to deal with the situation. It is believed that an IMF bailout package will bring some relief and stability to the crisis-ridden economy. Sri Lanka has already completed the initial technical level negotiations with the IMF. Currently, An IMF delegation is visiting Sri Lanka to study the policy reforms issues relevant to reaching a staff-level agreement. The delegation in its interaction with the Sri Lankan leaders reaffirmed their commitment to support the island nation at this difficult time, in line with the IMF’s policies. However, the finalisation of the IMF deal will depend on the success of Sri Lanka’s negotiations with the creditors on debt restructuring. Sri Lanka has selected France-based Lazard as financial advisor and Clifford Chance LLP as legal advisor to support the country on debt restructuring. PM Wickremesinghe has also proposed holding a donor conference with India, China, and Japan to achieve unity among the creditors. However, the formal negotiations with creditors are yet to begin.

Until the IMF package is finalised, Sri Lanka is relying on bridge financing and other assistance from bilateral and multilateral partners. Several partners have responded positively in this regard including, Bangladesh, China, India, Japan, EU, New Zealand, Russia, USA, UN, World Bank, Food and Agricultural Organisation and so on.  A few of them have already extended their assistance, and others have expressed their willingness to do the same.

India has so far been the most forthcoming and largest assistance provider to Sri Lanka. It is noteworthy to mention here that India has played a significant role in the IMF as well as in the regional and plurilateral organisations in encouraging other countries to support Sri Lanka in dealing with the post-COVID normalization of economic activity, which has been well acknowledged and appreciated by the island nation. On the sideline of the Quad summit in Tokyo PM Modi met PM of Japan Fumio Kishida and discussed the situation in Sri Lanka and confirmed that they would cooperate with each other in light of the current economic crisis and deterioration of the humanitarian situation in the country.”

India’s bilateral assistance to Sri Lanka to deal with the economic crisis can be divided into two broad categories: 1) assistance to meet the immediate requirements and 2) assisting Sri Lanka in its effort to revive the sectors which got affected due to the global pandemic and foreign reserves crisis.

To meet the immediate requirements, the Government of India has provided food, health and energy security package as well as foreign reserves support amounting to more than US$ 3.5 billion including a concessional loan of US$ 1 billion to the Government of Sri Lanka on 17 March 2022 which will be available up to 16 March 2023, a Line of Credit (LOC) of US$ 500 million for financing purchase of petroleum product such as diesel, petrol and aviation fuel in February 2022, a consignment of 40,000 MT of fuel supplied by Indian Oil Corporation outside the LOC facility. Sri Lanka has sought another US$500 LOC for energy procurement from India. Official confirmation from India is awaiting.

In order to support the dwindling foreign reserves, India has extended a currency swap facility of US$ 400 million under the SAARC Currency Swap Framework 2019-22, and deferment of dues of about US$ 1 billion till March 2022, to be paid by the CBSL to the Reserve Bank of India, under the Asian Clearing Union.

Furthermore, a large consignment of drugs and medical supplies was gifted to various hospitals in Sri Lanka responding to the urgent requirement for drugs. kerosene has also been supplied for the use of fishermen in Sri Lanka. India is also directly reaching out to needy sections of Sri Lanka. In April 2022 Indian High Commissions officials distributed dry ration packs to widows and other needy families of Kalmunai in Ampara District ahead of Eid ul Fitr. Humanitarian assistance worth US$ 16 million has also been committed by the Tamil Nadu government which includes 40,000 MT of rice, 500 MT of milk powder and medicines for the people of Sri Lanka.

In addition to meeting the immediate economic and financial needs of the country, the Sri Lankan Government is in urgent need to revive the revenue-generating and foreign exchange earning sectors. Revenue generation from tourism declined to a concerning level due to the global pandemic. India has committed to assist Sri Lanka in its effort to revive the tourism sector. The establishment of the air bubble arrangement between India and Sri Lanka in April 2021, the holding of the third Joint Working Group Meeting on Tourism, and the inaugural flight from Sri Lanka to Kushinagar airport in October 2021 are significant developments in this regard. Despite the COVID-related restrictions in 2021, 56,268 Indian tourists (which translates into about 29% of total arrivals) visited Sri Lanka.

Sri Lankan Government’s faulty policy of introducing organic farming overnight by banning the import of chemical fertilisers in 2021 severely impacted agricultural production. Even though the ban has been lifted, the country is facing severe shortages of fertilisers for the harvesting season. At the request of the government of Sri Lanka, the Government of India has agreed to offer a Dollar credit line amounting to US$ 55 million for the procurement of 65000 MT Urea fertiliser from India for the Yala season cultivation. In 2021 also after Sri Lanka canceled a deal with China to import organic fertiliser, India exported 100,000 Kg of Nano Nitrogen to meet the farmers’ needs. 

At the moment the worst affected sector in the Sri Lankan economy is the energy sector. India and Sri Lanka have entered into several cooperative arrangements to strengthen the sector including an Agreement to jointly develop the Trincomalee oil tanks farm, a joint venture between NTPC Limited from India and the Ceylon Electricity Board (CEB) for developing a 100 MW Solar Power Plant at Sampur, a deal for setting up two renewable energy projects in Northern Sri Lanka. Reportedly, discussions are also going on to interconnect the grids of India and Sri Lanka through overhead cables.  

India’s assistance to Sri Lanka is in line with its policy of “neighbourhood first” and vision for “Security and Growth for All (SAGAR).” These twin principles underline India’s emphasis on emerging as a first respondent as well as working in collaboration with other countries to meet the requirements of neighbouring countries in the Region. The Sri Lankan crisis is not just a domestic problem. It has a spill-over effect on India and other countries in the region too. Hence India has adopted a multi-pronged approach to the Sri Lankan crisis not just to provide immediate assistance, but also to help the country in reviving the economy and stability. In this context, both sides highlighted the importance of promoting the India-Sri Lanka investment partnership in the fields of infrastructure, connectivity, renewable energy, and deepening economic linkages between the two countries among many other efforts.

While large sections of Sri Lankans are appreciative of India’s effort, a constituency in Sri Lanka does exist that is doubtful and critical of India’s approach to the Sri Lankan problem. According to this section, India has been allegedly taking advantage of the Sri Lankan crisis to encourage crony and further its strategic ambitions. Given the experience in the India-Sri Lanka bilateral relations, there is a high probability that the anti-India constituency can be the spoiler in the effort of deepening economic interlinkages between the two countries.

Following the signing of the “four pillar economic cooperation agreement”, both the countries have established an official-level mechanism for conducting the economic dialogue. Since December 2021, there has been significant progress in the economic engagement between the two countries. To continue the momentum, it is crucial that both sides are engaged regularly and address each other’s concern (if there is any) immediately before it is blown out of proportion.

The short visit by the delegation led by Foreign Secretary on 23 June was part of joint efforts initiated by both countries to work in close coordination towards strengthening diplomatic and economic engagement.    

(Author is Associate Fellow, Manohar Parrikar Institute for Defence Studies and AnalysesViews expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited).

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