Editorial: Rescue Act

By announcing a liberal financial package to Sri Lanka to help overcome an unprecedented financial crisis, India has consolidated its standing as a reliable friend in times of need and sought to reset its relations with the island nation. Apart from extending a billion-dollar loan credit facility, to be used to avert a food crisis […]

By announcing a liberal financial package to Sri Lanka to help overcome an unprecedented financial crisis, India has consolidated its standing as a reliable friend in times of need and sought to reset its relations with the island nation. Apart from extending a billion-dollar loan credit facility, to be used to avert a food crisis while allowing for the import of essential items and medicines, and a $ 500 million for importing fuel from India, New Delhi is prepared to go the extra mile to help. India’s gesture is commendable, given the fact that Colombo has been tilting towards China over the years. In fact, the island nation has become a victim of China’s debt trap policy. Sri Lanka”s foreign debt has increased steadily since 2014, reaching 41.3% of the GDP in 2019. The foreign reserves stand around $1.6 billion, which is barely enough for a few weeks of imports while the foreign debt obligations would exceed $ 7 billion in 2022. Sri Lanka’s foreign exchange crisis has increased manifold because of its inability to meet the monetary obligations to China on several projects. Beijing’s Belt and Road Initiative (BRI) also allowed Sri Lanka to borrow commercial loans on infrastructure projects without strict conditionality, thus luring the island country into massive forex debt. The economy has also been affected due to low receipts from tourism and remittances, the two main foreign exchange earners.

The swift help from New Delhi was in sharp contrast to the arrogant attitude of China which blacklisted the People’s Bank of Sri Lanka for withholding payment to a Chinese company for organic fertilizer which was found to be contaminated. Since his return to power two years ago, Mahinda Rajapaksa has shown a clear tilt towards China and paid scant attention to India’s strategic interests. Sri Lanka plays a pivotal role for India to control the strategic choke points in the Indian Ocean region. However, by pumping in huge investments into infrastructure and port development projects and forcing Colombo into an irreversible strategic embrace, China can have easy access to them. This will have huge security ramifications for India. Over the years, China has become the biggest investor in Sri Lanka, building expressways, ports, power projects and many of such infrastructural needs that it got on lease for 99 years. This has created a debt trap problem for the country, which owes $1.3 billion to China. International rating agencies had expressed doubts over Sri Lanka’ ability to meet its international sovereign bond payments. The Sri Lankan government declared a national financial emergency in August last year, following a sharp drop in the value of the country”s currency, which resulted in rising food costs. The growing debt problem of Sri Lanka would certainly impact India’s security interests because it would push Colombo deeper into the Chinese sphere of influence.

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