Indian aid to crisis-ravaged Sri Lanka

By Gulbin Sultana, PhD

A delegation of senior officials of the Government of India, led by Foreign Minister Vinay Kwatra, and comprising Secretary of the Ministry of Economy Ajay Seth, Chief Economic Adviser Dr. V. Anantha Nageswaran and Joint Secretary, Indian Ocean Region, Ministry of Foreign Affairs Kartik Pande, visited Colombo on June 23, 2022 to take stock of the situation on the ground in Sri Lanka and explore the areas of cooperation for mutual benefit.

The visit came at a time when the country is struggling to provide enough food, fuel, medicine and other essentials to meet the people’s daily needs due to insufficient foreign reserves. According to the Central Bank of Sri Lanka (CBSL), at the end of April 2022, official gross reserves were US$1.8 billion, including the swap facility of the People’s Bank of China, equivalent to approximately US$1.5 billion, subject to usability. Under the China Swap Agreement, Sri Lanka can only use that money if it has enough foreign reserves for three months. Unfortunately, for three months since the inception of the loan, Sri Lanka has not had sufficient foreign exchange reserves and thus was unable to use the Chinese swap facility. This indicates that actual foreign reserves at the end of April 2022 were likely to be only about US$300 million instead of US$1.8 billion, while the country needs US$690 million per month for fuel imports (US$500). million), gas (US$40 million) and food (US$150) to meet the daily needs of the people. The country lacks not only foreign reserves but also Sri Lankan rupees. As a result, CBSL had to squeeze rupees to pay government employees’ salaries, which in turn caused high inflation. The country has defaulted on its debts for the first time in its history. It is also the first time in Sri Lanka’s history that the United Nations (UN) has had to make a food aid request to the people of the island. Sri Lankan Prime Minister Ranil Wickremesinghe has declared in parliament that Sri Lanka’s debt-ridden economy has completely collapsed.

The Sri Lankan government is counting on outside help to deal with the situation. An IMF bailout is believed to bring some relief and stability to the crisis-ridden economy. Sri Lanka has already completed the first technical-level negotiations with the IMF. An IMF delegation is currently visiting Sri Lanka to study the policy reforms relevant to reaching a staff-level agreement. In its interaction with the Sri Lankan leaders, the delegation reaffirmed their commitment to support the island nation during this difficult time, in line with IMF policy. However, the finalization of the IMF deal will depend on the success of Sri Lanka’s negotiations with creditors on debt restructuring. Sri Lanka has selected France-based Lazard as its financial advisor and Clifford Chance LLP as its legal advisor to support the country in debt restructuring. Prime Minister Wickremesinghe has also proposed holding a donor conference with India, China and Japan to achieve unity among creditors. However, formal negotiations with creditors have yet to begin.

Until the IMF package is finalized, Sri Lanka will rely on bridge financing and other assistance from bilateral and multilateral partners. Several partners have responded positively in this regard, including Bangladesh, China, India, Japan, the EU, New Zealand, Russia, the US, the UN, the World Bank, the Food and Agriculture Organization and so on. Some of them have already provided their help and others have expressed their willingness to do the same.

India has been the most progressive and largest aid worker to Sri Lanka to date. It is noteworthy to mention here that India has played an important role in the IMF and in the regional and plurilateral organizations in encouraging other countries to support Sri Lanka in addressing the post-COVID normalization of economic activity, which is widely recognized and appreciated by the island nation. On the sidelines of the Quad summit in Tokyo, Prime Minister Modi met with Japanese Prime Minister Fumio Kishida and discussed the situation in Sri Lanka and confirmed that they would work together in light of the current economic crisis and the worsening humanitarian situation in the country. †

India’s bilateral aid to Sri Lanka to deal with the economic crisis can be divided into two broad categories: 1) aid to meet immediate needs and 2) aid to Sri Lanka in its efforts to the global pandemic have been hit, revitalize and foreign exchange crisis.

To meet immediate needs, the Government of India has provided a food, health and energy security package, as well as aid to foreign reserves in excess of USD 3.5 billion, including a USD 1 billion concessional loan to the government. from Sri Lanka on March 17, 2022, which will be available until March 16, 2023, a $500 million line of credit (LOC) to finance the purchase of petroleum products such as diesel, gasoline and aviation fuel in February 2022, a consignment of 40,000 tons delivered fuel by Indian Oil Corporation outside the LOC facility. Sri Lanka has requested another US$500 LOC for energy sourcing from India. Official confirmation from India is still pending.

To support dwindling foreign reserves, India has extended a USD 400 million currency swap facility under the SAARC Currency Swap Framework 2019-22, and deferred dues of approximately USD 1 billion until March 2022, payable by the CBSL to the Reserve Bank of India, under the Asian Clearing Union.

In addition, a large batch of medicines and medical supplies were donated to several hospitals in Sri Lanka to respond to the urgent need for medicines. Kerosene has also been supplied for use by fishermen in Sri Lanka. India also reaches out directly to needy parts of Sri Lanka. In April 2022, officials of the Indian High Commission distributed dry ration packages to widows and other needy families of Kalmunai in Ampara district, ahead of Eid ul Fitr. Humanitarian aid worth $16 million has also been pledged by the government of Tamil Nadu, including 40,000 tons of rice, 500 tons 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 revitalize the income-generating and foreign-exchange sectors. Tourism revenue generation fell to worrying levels due to the global pandemic. India has pledged to assist Sri Lanka in its efforts to revitalize the tourism industry. The conclusion of the India-Sri Lanka Air Bubble Agreement in April 2021, the holding of the Third Joint Working Group Meeting on Tourism and Sri Lanka’s inaugural flight to Kushinagar Airport in October 2021 are important developments in this regard. Despite the COVID-related restrictions in 2021, 56,268 Indian tourists (which translates to about 29% of total arrivals) visited Sri Lanka.

The Sri Lankan government’s flawed policy to introduce organic farming overnight by banning chemical fertilizer imports by 2021 had serious implications for agricultural production. Although the ban has been lifted, the country is facing serious shortages of fertilizers for the harvest season. At the request of the Government of Sri Lanka, the Government of India has agreed to offer a $55 million dollar line of credit for the purchase of 65,000 tons of urea fertilizer from India for seasonal Yala cultivation. In 2021, even after Sri Lanka canceled an agreement with China to import organic fertilizers, India exported 100,000 kg of nanonitrogen to meet farmers’ needs.

At present, the energy sector is the worst affected sector in the Sri Lankan economy. India and Sri Lanka have entered into several cooperation agreements to strengthen the sector, including an agreement for the joint development of the Trincomalee oil tank farm, a joint venture between NTPC Limited of India and the Ceylon Electricity Board (CEB) to develop a 100 MW solar power plant in Sampur, a deal to set up two renewable energy projects in northern Sri Lanka. Talks are also reportedly underway to connect the grids of India and Sri Lanka via overhead cables.

India’s aid to Sri Lanka is consistent with its “neighbourhood first” policy and “Security and Growth for All (SAGAR)” vision. These twin principles underline India’s emphasis on being the first respondent and collaborating with other countries to meet the demands of neighboring countries in the region. The crisis in Sri Lanka is not just a domestic problem. It also has a spillover effect on India and other countries in the region. Therefore, India has taken a multi-pronged approach to the crisis in Sri Lanka, not only to provide immediate relief, but also to help the country revitalize its economy and stability. In this regard, both sides stressed the importance of advancing the investment partnership between India and Sri Lanka in infrastructure, connectivity, renewable energy and deepening economic ties between the two countries, among many other efforts.

While large segments of Sri Lankans appreciate India’s efforts, there is a constituency in Sri Lanka that is questionable and critical of India’s approach to the Sri Lankan problem. According to this section, India has taken advantage of the crisis in Sri Lanka to encourage friends and further its strategic ambitions. Given the experience in bilateral relations between India and Sri Lanka, there is a good chance that the anti-Indian constituency could be the spoiler in the effort to deepen the economic ties between the two countries.

Following the signature of the “Four Pillar Economic Cooperation Agreement”, both countries set up an official-level mechanism for conducting economic dialogue. Since December 2021, significant progress has been made in economic cooperation between the two countries. To keep the momentum going, it’s critical that both parties engage regularly and address each other’s concerns (if any) immediately before they blow out of proportion.

The brief visit of the delegation led by the Minister of Foreign Affairs on 23 June was part of the joint efforts of both countries to work in close coordination to strengthen diplomatic and economic engagement.

(Author is Associate Fellow, Manohar Parrikar Institute of Defense Studies and Analysis)The opinions expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproduction of this content without permission is prohibited).

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