Sri Lankan Crisis: A Management Disaster

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Colombo seems to have come to a blind alley, but there is a glimmer of hope as trusted development partners like India and multilateral financial institutions are trying to help the country in salvaging the present economic crisis.

Symptoms of the Sri Lankan economic problems includes foreign exchange/essential commodities shortages & spiralling inflation, and its causes are deep rooted.

The International Monetary Fund (IMF) recently noted that Sri Lanka faces a “clear solvency problem” due to unsustainable debt levels, as well as persistent fiscal and balance-of-payments shortages.

Sri Lanka is facing its worst ever economic crises since its independence in 1948, amidst growing inflation (around 19 per cent) and deteriorating living conditions.

Citizens are suffering the harsh summer with daily power cuts of 13 hours along with food shortages. The crisis is so serious that even Ajith Nivard Cabraal, Governor of Central Bank of Sri Lanka had offered to step down.

Till few years ago Sri Lanka displayed highest per capita income and human development index in South Asia, but the country was pushed to the economic brink due to a lopsided growth model.

Colombo adopted an infrastructure centric growth model based on Beijing’s growth model, hoping that it would be able to create jobs and usher prosperity for the island nation. It turned towards China for funding its infrastructure projects that had no guarantee of revenue generation.

Meanwhile, vital economic sectors like basic food production were neglected. If Colombo had invested at least in renewal energy, the present crisis could have been averted to some extent.

In its efforts to speed up its economic growth, Sri Lanka’s political leadership resorted to short-sighted planning and quick fixes.

Infrastructure – led growth, typical Chinese model, was successful mostly because China strengthened its manufacturing base and promoted exports at the same time. However, Sri Lanka’s infrastructure development was based on borrowing while its foreign exchange earning remained highly dependent on tourism.

Essentially, the country has been caught in a vicious cycle of borrowing from China for unviable infrastructure projects and being unable to pay back the loan, resulting in either giving up control of the projects or taking other loans to repay China. This has served only Beijing’s strategic interest.

Further, Chinese loans were used for not only large scale projects like Hambantota port and Colombo Port City but also for roads and water treatment plants.

Moreover, Chinese investment in infrastructure projects also resulted in increasing the import of construction materials. For example, the construction of the Southern Expressway had significant imports of Chinese construction equipment and materials.

The economic crisis in Sri Lanka intensified further as the Covid-19 pandemic slowed down its lead sector, i.e., tourism, which in turn aggravated its foreign exchange crisis.

In the face of this unmitigated crisis, New Delhi has offered two emergency lines of credit to Colombo on humanitarian grounds, including $1 billion for buying essential commodities. Under the other $500 million credit line, India handed over 40,000 MT of diesel to Colombo recently. In last 50 days, India has sent 200,000 MT of diesel to Sri Lanka.

People of India feel that Government of India should do more for Sri Lanka to salvage its economic crisis. These aspirations are in line with the long held cultural ties and close affinity.

Since January 2022, India has been assisting Sri Lanka considering the difficulties experienced by its citizens. It had provided $2.4 billion financial assistance, including a credit swap of $400 million and deferment of an Asian Clearing Union payment of over $515 million.

Meanwhile, public protests in the country are gaining momentum and the government has resorted to imposing an emergency. All Sri Lankan Cabinet Ministers have resigned. In an effort to avert political uncertainty, India is trying to ensure supply of essentials to the people of Sri Lanka.

This is also necessitated as despite the economic crisis as well as Sri Lankan appeal for debt restructuring or extension of a credit line, China has not agreed to either so far. It is viewed that rather than wasting time, multilateral agencies should help Sri Lanka and India should not dither from using its clout for the same. Time is running out for Colombo and the beleaguered Sri Lankan nationals.

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