Context

Ranil Wickremesinghe’s election as the President of Sri Lanka in a crucial Parliament vote on July 20, 2022, gives India an opportunity to take the lead in the foreign aid game in its neighbourhood.

Background of the crisis in Sri Lanka

• Sri Lanka has been facing economic turbulence since its pre-emptive default on its foreign debt obligations in mid-April this year.
• Following the debt default and a shortage of dollars, the Sri Lankan economy is experiencing stagflation.
•  Inflation has spiralled to over 50%, translating into higher food and fuel prices.
•  Sri Lanka’s worst economic crisis since its independence in 1948 is due to a tepid recovery from the COVID-19 pandemic, the Russia-Ukraine conflict shock and economic mismanagement under the administration of the Rajapaksas.
• Sri Lanka is also facing challenges in getting foreign aid, as 60% of the world’s poorest countries are also experiencing debt distress.

Opportunities for India

•  In the first six months of 2022, Indian aid worth $3.8 billion has flowed to Sri Lanka through loans, swaps and grants.
• This is India’s largest bilateral aid programme in recent times.
•  Stabilising Sri Lanka’s economy could prove to be a major win for Indian’s ‘neighbourhood-first’ policy.
• Moreover, once the Sri Lankan economy stabilises, India can deepen its trade and investment linkages with Sri Lanka, transcending the current humanitarian aid relationship.
• On the other hand, an unstable Sri Lankan economy could pose security risks to India and lead to a flood of refugees across the Palk Strait.
• This is an opportunity for India to strengthen bilateral and regional partnerships.
• Countering Chinese influence: In recent years, China has emerged as a major partner for Sri Lanka, especially for infrastructure projects, many of which are under scrutiny now.
• This provides an opportunity for India to upscale its aid and cement its first mover advantage over China by leading an aid consortium for Sri Lanka, working closely with other friendly countries such as the United States, Japan and the European Union as well as the International Monetary Fund (IMF).

Why China is reluctant to help?

• China worries that unilaterally restructuring Sri Lanka’s debt or giving it moratoria would set a new precedent in its lending practices, leading to a queue of similarly distressed countries seeking debt relief from Beijing.
• Furthermore, China, which is a G2 economy, and wanting to challenge the U.S., does not want its reputation to be tarnished by bailing out a floundering economy.

Steps Sri Lanka needs to take

• Concluding the talks with Sri Lanka: The government must show that it is serious about stabilising the economy by concluding talks on an IMF programme which will increase taxes and utility prices to raise revenue and increase interest rates to control inflation.
• Economic reforms: It has to implement structural reforms to make the economy more open to trade and investment and allow market forces to determine resource allocation.
• National consensus on IMF program: It has to build national consensus on implementing the IMF programme and reforms by explaining that this is the only solution to the crisis.
• Anti-corruption policies: It has to restore the rule of law and enforce strong anti-corruption policies (including asset declarations for all parliamentarians and a strong anti-corruption office supported by the United Nations).
• Reset foreign policy: It has to reset foreign policy towards a more neutral direction.

Conclusion

With political will and the right set of policies, Sri Lanka stands a sporting chance of achieving some economic normalcy within the next three years. India stands to gain by supporting Sri Lanka in its hour of need. A friend in need is a friend indeed.

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