India comes to Sri Lanka’s rescue at a crucial moment

India-SL relations should be put on a stable path. The bilateral ties between Sri Lanka and India have seen a history of ups and downs

In the early stages of the Gotabaya administration, the general view was that India was getting stepmotherly treatment in Sri Lanka. Some of the inked deals with the previous administration were abrogated. For example, going back on the 2019 agreement with India and Japan to build the East Container Terminal at the Colombo Port. 

However, later on, Adani Group entered into a $ 700 million deal to build a strategic deep-sea container terminal. Adani Group will build a brand-new terminal next to a $ 500-million Chinese-run jetty in the Colombo port. Adani Group is building the terminal in partnership with John Keells, and the Ports Authority as a minority partner. The first phase of the project with a 600-metre terminal is due to be completed by 2024. The terminal according to sources will revert to Sri Lanka ownership after 35 years of operation.

Shortage in essentials 

Sri Lanka is facing a severe shortage in oil, gas, medicines, and food items, because of a shortage of forex. According to the Economic Times: India is working out a package on an urgent basis to assist Sri Lanka, that is focused on measures to tide over an economic crisis that the country is facing. According to the report, India is expected to extend a food and health security package to Sri Lanka on an urgent basis, along with an energy security package and currency swap, and also push Indian investments. The food and health security package would envisage the extension of a line of credit to cover the import of food, medicines and other essential items from India.

It is said the energy package would also comprise a line of credit to cover import of fuel from India, and an early modernisation of the Trincomalee Oil Tank Farm. According to reliable sources, India in the last six months has provided assistance on several fronts to assist its tiny neighbour to get over a severe economic crisis partly manmade due to as pointed out by ex CBSL Deputy Governor Dr. Wijewardana that “the Government made serious policy errors when it announced an unsolicited, attractive tax concession to income taxpayers. The consequence of this extraordinary money growth was the building up of inflationary pressure in the domestic economy on one side, and the depletion of foreign reserves putting pressure on the rupee to depreciate in the market, on the other.” 

The rest of the crisis was due to the massive drop in tourist-related earnings in 20/21, heavy debt repayments and an increase in pandemic-related expenses. The result of all this was that 500,000 people according to the World Bank have fallen below the poverty line, whilst food inflation hit 21%.

Assistance from India in the last six months have come in the form of;

1. $ 500 million oil line of credit 

2. $ 1 b line of credit for essentials to be imported from India under negotiation 

3. Currency swap $ 400 million 

4. Deferral of $ 515 million under Asian Clearance Union

5. 40,000 MT of fuel on credit 

6. 100,000 Rapid Antigen Test kits 

7. Supply of 1,000 tons of liquid medical oxygen  

Impact of the Ukrainian conflict 

According to published data, Lanka’s oil bill in 2021 had increased by 50%, compared with the last year. The country’s foreign exchange crisis has got amplified with the drop in the nation’s remittance flow from its overseas workers. As a result, the country’s Gross Domestic Product growth is under pressure and its foreign exchange reserves is less than $ 1 billion. The unofficial depreciation of the rupee against the dollar is around 12%-15%. The tourism industry, which represents over 10% of the country’s GDP and brings in valuable foreign exchange, is slowly recovering and exports are on the rise. Unfortunately, the growth in imports have been far greater than the growth in exports. 

Oil dependent Sri Lanka’s problems got further aggravated with oil prices surging despite new measures by the US and EU aimed at calming markets troubled by the invasion of Ukraine. Brent crude – the international benchmark for oil prices – hit a record $ 110 a barrel, marking the highest level seen in more than seven years. This means Sri Lanka would need an additional $ 1.5 billion this year to import oil. Therefore, the Indian assistance at this time, is timely and impactful on several fronts. Sri Lanka would certainly need more assistance from them to ride over 2022. 

Diplomacy

India often focuses on soft diplomacy than hard diplomacy when dealing with its tiny neighbour. Moreover, they do not do a song and dance about their generosity or assistance, unlike many organisations or countries. However, given Sri Lanka’s topsy turvy foreign policy, India certainly needs to highlight their contribution and what better time to do so. But given the sensitive nature of the New Delhi-Colombo relations and Sri Lanka’s strategic location and its heavy dependency for FDI, and the timing of the rescue package, undoubtedly appreciated by the country, it would still be prudent for India to approach the future cautiously and for Sri Lanka to be mindful of the true meaning of non-alignment as it plans its way out of the acute economic crisis, the worst since independence. The way-out strategy would certainly require the support of several of our trading partners and bilateral and multilateral partners.