Fiscal prudence is pre-requisite to sustainable growth, a lesson that the island nation of Sri Lanka is, unfortunately, showcasing from it’s ongoing economic upheaval. Every commitment, economic, strategic, bilateral or otherwise, has to be made taking into account the financial, political and growth realities of the country. In order to become advanced, powerful, empowered, glamorous, well-equipped, and similar adjectives, a nation must first strive to become relevant, a mantra being rightly followed by democracies like India. Relevance has now become the ultimate aim, everything else follows.
The island nation of Sri Lanka is in shreds, with protesters taking to the streets in defiance of curfews and cabinet ministers resigning en masse amidst crippling inflation. The South Asian republic has become a classic example of a twin deficits economy, with national expenditure exceeding national income and imports greater than exports. Though, It has sought loans from the Asian Development Bank, India and China to survive the crisis, it would be back-breaking for the country to carry a debt that mounts to billions now, due to accumulated borrowings, record inflation, lack of foreign currency, crucial sectors witnessing a sharp fall in demand thanks to the pandemic. Alleged government mismanagement is another parallel factor that has dragged Sri Lanka into not just an unprecedented economic crisis but also a massive political turmoil.
The Sri Lankan government over the last decade borrowed vast sums of money from foreign lenders to fund public services, which has landed the nation in a debt trap when hit by disasters, both natural, such as heavy monsoons, to man-made, including a government ban on chemical fertilizers that crippled farmers’ harvests. In addition to this, a severe shortage of foreign currency has left the country unable to pay for essential imports, including fuel, leading to debilitating power cuts that lasted up to 13 hours.
The crisis has turned real severe in matter of days, with President Gotabaya Rajapaksa now under a pressure to resign as protests escalate across the country. Sri Lanka’s tourism sector, one of the major contributors to its economy, which was already on a slow-down, reviving slowly after the COVID outbreak, has now been hit hard yet again. The Sri Lankan rupee is fast depreciating against the dollar and foreign debt is mounting. Government’s income has also taken a big hit due to a drop in tourism that has given rise to gas and fuel shortages, leading to massive power cuts. As a result, citizens of Sri Lanka have been facing the brunt of shortages and soaring inflation, waiting in lines for basic goods, skyrocketing prices of basic amenities, shortage of fuel and a defunct administration. This soon led to aggressive protests by the citizens and forced President Rajapaksa to declare national emergency in the state on April 1, followed by blocking of social media platforms across the nation.
To address the worsening situations, the country had to seek support from IMF and neighbour India. A consignment of 40,000 MT of diesel under Indian assistance through a Line of Credit of $500 mn was handed over to Colombo by India on 2nd April. Earlier in January, India had confirmed a $400 million currency swap with Sri Lanka while deferring another $500 million due for settlement to the Asian Clearing Union (ACU). India continues to provide fuel and goods assistance to the crisis-hit nation as it grapples to bring the situation under control. Sri Lanka has been provided with more than 270,000 MT of petrol and diesel by India so far. India also announced another $1 billion as a credit to Sri Lanka to help shore up the sinking economy of the island nation. The $1 billion lines of credit to Colombo will help in keeping their food prices and fuel costs under check.
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