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The Great Sri Lankan Crisis

The Context:

Anti-government sentiment in various parts of Sri Lanka has resulted in political instability. It is fueled by anti-government protests and public demonstrations in response to the country’s economic crisis. The Sri Lankan economy has been in crisis as a result of a severe Balance of Payments (BoP) problem. Its foreign exchange reserves are rapidly depleting, making it increasingly difficult for the country to import essential consumer goods.

Prime Minister Wickremesinghe and President Gotabaya Rajapaksa both indicated their willingness to step down, paving the way for an all-party government to take over.

Relevance:

GS Paper 2: International relations: India and its neighbourhood

Mains Question:

India’s “Neighborhood First” policy can go the extra mile to assist Sri Lanka in its current crisis. Justify your position.


The roots of the downfall

  • When Sri Lanka emerged from a 26-year civil war in 2009, its post-war GDP growth rate was relatively high, averaging 8-9 percent per year until 2012.
  • However, after 2013, its average GDP growth rate nearly halved as global commodity prices fell, exports slowed, and imports increased.
  • During the war, Sri Lanka’s budget deficits were high, and the global financial crisis of 2008 depleted its forex reserves, forcing the country to borrow 2.6 billion dollars from the International Monetary Fund (IMF) in 2009.
  • It approached the IMF again in 2016 for another USD 1.5 billion loan, but the IMF’s conditions worsened Sri Lanka’s economic health.

Recent Economic cyclones:

  • The Easter bomb blasts in churches in Colombo in April 2019, which resulted in 253 casualties, significantly reduced the number of tourists, causing a drop in foreign exchange reserves.
  • During their campaign, the newly formed government led by Gotabaya Rajapaksa promised lower tax rates and broad SoPs for farmers.
  • The hasty fulfilment of these promises exacerbated the problem.
  • The Covid-19 pandemic in 2020 had an impact on tea, rubber, spices, garments, and the tourism industry.
  • China’s Debt Trap Policy contributed significantly to Sri Lanka’s economic insecurity.
  • The Sri Lankan crisis is caused by a lack of foreign exchange (forex) reserves, which have fallen by 70% in the last two years to just USD 2 billion by the end of February 2022.
  • Meanwhile, the country faces approximately USD 7 billion in foreign debt obligations in 2022.

Effects on India

  • Sri Lanka’s share of total Indian exports has fallen from 2.16 percent in FY15 to 1.3 percent in FY22.
  • Automobile companies such as Tata Motors and TVS Motors have ceased exports of vehicle kits to Sri Lanka and ceased production at their Sri Lankan assembly plants due to the country’s volatile currency reserves and fuel shortages.
  • Whenever there has been a political or social crisis in Sri Lanka, India has seen a large influx of ethnic Tamil community refugees from Sinhala Land to India via the Palk Strait and the Gulf of Munnar.
  • However, India may struggle to handle such an influx and will require a strong policy to deal with the crisis.
  • The state of Tamil Nadu has already begun to feel the effects of the crisis, with the reported illegal arrival of 16 people from Sri Lanka.

Open Opportunities:

  • With Sri Lanka abruptly ceasing tea supply to the global tea market, India is eager to fill supply gaps.
  • India could expand its presence in Iran as well as new markets such as Turkey and Iraq.
  •  Big Sri Lankan tea importers from Iran, Turkey, Iraq and Russia are reportedly visiting India for tea plantations in Assam and Kolkata.
  • As a result, the average price for orthodox leaf increased by up to 41% at recent Kolkata auctions compared to corresponding sales last year.
  •  Many apparel orders from the United Kingdom, European Union, and Latin American countries are now being diverted to India.
  •  Several orders have been given to companies in Tirupur, the hub of the textile industry in Tamilnadu.

What India Need to do?

  • With Sri Lanka abruptly ceasing tea supply to the global tea market, India is eager to fill supply gaps.
  • India could expand its presence in Iran as well as new markets such as Turkey and Iraq.
  • Big Sri Lankan tea importers from Iran, Turkey, Iraq and Russia are reportedly visiting India for tea plantations in Assam and Kolkata.
  • As a result, the average price for orthodox leaf increased by up to 41% at recent Kolkata auctions compared to corresponding sales last year.
  • Many apparel orders from the United Kingdom, European Union, and Latin American countries are now being diverted to India.
  • Several orders have been given to companies in Tirupur, the hub of the textile industry in Tamilnadu..

So what is the Way Forward

  • For better crisis management in Sri Lanka, a strong political consensus is required. Administration’s militarization can be reduced.
  • Considerations are required to assist the poor and vulnerable in regaining their footing and preventing long-term scarring.
  • Increased agricultural productivity, increased job opportunities in non-farming sectors, better reform implementation, and revitalization of the tourism sector are among the steps.
  • India, which has followed the “Neighborhood First policy” to strengthen ties with its neighbours, can go the extra mile to assist Sri Lanka in overcoming the current crisis and realising its full potential, reaping the benefits of a stable, friendly neighbourhood.
  • Indian businesses can create supply chains that connect the Indian and Sri Lankan economies in a variety of goods and services ranging from necessities to information technology services.
  • Over 270,000 metric tonnes of diesel and petrol have been delivered to Sri Lanka since mid-March.
  • Furthermore, approximately 40,000 tonnes of rice were supplied under the recently extended USD 1 billion credit facility.
  • India can chart the course of Sri Lankan participation in multilateral forums such as the G20, which will provide Sri Lanka with a base of assistance from developed nations.
  • Sri Lanka has approached the IMF for assistance. The IMF can assist Sri Lanka in overcoming its current economic crisis.
  • The IMF can help Sri Lanka restore macroeconomic stability and debt sustainability while also protecting the poor and vulnerable, ensuring financial stability, and accelerating structural reforms to address corruption vulnerabilities and unlock the country’s growth potential.
  • With regard to Sri Lanka’s economic insecurity, the circular economy can reduce reliance on imports and provide a sustainable alternative to aiding recovery.
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December 2022
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