26 Jul Assisting Sri Lanka
Assisting Sri Lanka
(GS Paper-II, Polity,Constitution,Governance,Social Justice and International Relations)
Source: The Hindu
Why in news?
India, which hosted an all-party meeting on the Sri Lankan situation, made a commitment to help Sri Lanka, which is battling the destruction brought on by the economic crisis.
What are the causes of the crisis in Sri Lanka?
- Sri Lanka needed assistance from the International Monetary Fund (IMF) after the civil war with the Liberation Tigers of Tamil Eelam ended in 2009.
- The previous Sri Lankan governments have engaged in political corruption and economic mismanagement (fiscal and budgetary).
- The twin deficit issue of an unsustainable current account deficit and an unsustainable fiscal deficit is what led to the crisis.
- Following the Easter bombs and the epidemic, tourism completely dropped.
- Once more as a result of the epidemic, migrant workers’ remittances decreased.
- Due to the conflict in Ukraine and the increase in oil prices, import costs increased.
- On the internal front, however, the Rajapaksa administration is solely to blame for the fiscal disaster. It was in charge of three things in particular:
- Unaffordable populism through tax cuts, erratic economic management, such as a sudden switch to organic farming, and a failure to approach the IMF early enough.
- The conflict was sparked by the significant tax holiday that Mr. Gotabaya Rajapaksa announced soon after becoming power.
Could the major nations have intervened to attempt to help sooner?
- No nation could have prevented Sri Lanka’s catastrophe by itself since it was so severe.
- A nation would have taken on additional burdens without truly resolving the crisis if it had intervened unilaterally to address the issue.
- The only thing that nations can do bilaterally is offer a bridge loan, which is what India has done. However, the IMF must provide a structured solution.
- Therefore, in a crisis like this, the IMF is needed, as well as the backing of other nations for the IMF programme.
What assistance did India offer?
- At the end of 2021, Sri Lanka requested a rescheduling of the debt repayment with India.
- India recently provided Sri Lanka with aid of roughly $3.8 billion. India was unable to restructure all of Sri Lanka’s debt or provide all of the funding Sri Lanka requested.
- India provided timely and ample aid, giving Sri Lanka the breathing room it needed to approach the IMF and come to an agreement.
- Other nations have only offered the tiniest amounts of humanitarian aid; India’s generosity has been unmatched.
- The issue facing Sri Lanka cannot be resolved by the Indian Government alone. The IMF, the World Bank, the Asian Development Bank, and all other creditors must band together to release some financial pressure off Sri Lanka.
The actions China took
- The debt issue in Sri Lanka has two grievous faults related to China’s involvement.
- excessive reliance on China as a bilateral partner and foreign-currency sovereign borrowing.
- Due to the fact that many of these loans were used to fund infrastructure projects that took too long to complete or were underutilised, debt has accumulated without any income to cover it.
- To that extent, China is accountable for accruing debt, making reckless loans, and, most recently, for delaying help to Sri Lanka.
Are there any other resources that India should help Sri Lanka use instead of the IMF?
- Because of the worry that IMF conditionality is too strict and does not lead to long-term structural adjustment, nations all over the world have been looking for alternatives to the IMF.
- But neither bilateral agreements nor regional ones have shown to be a sufficient replacement for the IMF.
- The fact is that when a country is enrolled in an IMF programme, foreign creditors and investors feel more secure in returning to the nation.
- And because of this, Sri Lanka ought to have contacted the IMF earlier to prevent a decline in confidence.
How closely does Sri Lanka’s position resemble that of Indian States?
- Some Indian States are taking out loans and spending the money on giveaways that don’t increase productivity, future economic activity, or manufacturing capability.
- However, they increase current usage. They therefore do not encourage long-term growth.
- However, Indian States and Sri Lanka cannot be compared because the former is a member of a national economic body while the latter is an independent economic entity.
- India’s states don’t have their own balance of payments, and unlike Sri Lanka, they don’t owe money in foreign currencies.
- States in India cannot issue money to pay off internal debt, although Sri Lanka may, as it did.
How can India prepare for problems in the rest of South Asia?
- Given that Nepal is connected to us in numerous ways, India should pay close attention to it.
- The fact that Nepal’s currency is tied to ours and that its trade is entirely dependent on India is a consoling fact.
- Sri Lanka will be able to economise on hard currency if we implement the regionalization of the Indian rupee and make it easy for us to transact with them in rupees.
- India has digital payment options like BHIM that can be utilised in neighbouring nations like Nepal and Bhutan.
- Those conversations with Sri Lanka have not been able to continue.