by Rajesh Kumar Sinha 2 February 2022
The tiny island nation of Sri Lanka, besides Pakistan is another of the south Asian nations that currently is in the limelight for all the wrong reasons. For the past three months, this beautiful country is facing a severe economic crisis. There have been reports and speculation that the country is one the verge of loan payment default. Though the government sources have suggested that the situation is manageable and the prevailing economic crisis could be overcome with some restructuring of loans and better macroeconomic management, it is evident that the country is under a difficult economic stress.
Sri Lanka is facing an acute shortage of many essential commodities, leading to the rationing of such items and utilities, including power. The state power entity Ceylon Electricity Board, unable to pay for its fuels, is compelled to impose power cuts, both for residential and industrial consumers, at peak hours. The lone refinery of the island nation had to be shut for some time since it was not able to pay for crude imports in dollars. The recent request by the Sri Lankan President Gotabaya Rajapaksa to restructure loans to China, high inflation rate at 11.1 percent, food inflation at scary 16.9 percent, a drop in local currency value by 10.1 percent and 10.3 percent against US Dollar and Indian Rupee respectively while credit rating downgrading by Fitch’s and Moody’s, all indicate that the economy indeed is under severe strain.
There are several reasons attributed to the current state of economic crisis in Sri Lanka. An important factor, government sources suggest is the hoarding of essential commodities by speculators in a big way which has resulted in the huge increase in food prices and resultant declaration of economic emergency under the Public Security Ordinance. Central Bank of Sri Lanka had to prohibit traders from entering into foreign currency contracts and also plans to enter into tea swapping trade with Iran to settle oil debts which however, the tea industry in the country is not very hopeful of helping in tiding over the economic crisis.
Another very critical reason could be the dramatic decline in tourism revenues that contributes almost 10% of the country’s GDP. The Corona pandemic further hit the forex badly, down from US$ 7.5Billion (2019) to US$ 1.6Billion (2021). Another important reason has been massive mismanagement of economy by the government through the Organic Farming Policy that aims at making agriculture 100 percent organic by banning of chemical fertilisers. In spite of opposition from agriculture scientists and farmers, the pursuing of this policy has resulted in significant decline of crop production and agriculture.
Sri Lanka has been one of the major partners of the Chinese Belt and Road Initiative (BRI) project. As part of it, China has provided it with more than US$ 5Billion for various infrastructure projects like airport, ports and power projects but with a very high interest of more than 6% as against the usual loan interests of 2.5-3% offered by ADB, World Bank and other major lenders like India, Japan, US. With a reduced growth rate of around four percent and higher debt repayment obligations (US$ 7.3Billion to be paid in 2022), Sri Lanka many believe is entangled in the infamous Chinese debt trap that has already affected the economies of Laos, Zambia, Djibouti, Kyrgyzstan, Pakistan, Maldives and the country is moving in the same direction.
In recent years, Sri Lanka has moved closely to China that has replaced India as its largest investor and trading partner. Media reports have suggested that the significant upsurge in bilateral relationship is more due to the personal interests of ruling elite in Sri Lanka rather than mere economic and national interest sense. No wonder, government has been compelled to offer the strategically situated Hambantota Port on lease to China. That has affected its relationship with India which Sri Lanka has been trying to appease in one way or the other. It has also been forced to secure a significant US$ 900 million loans from India for the purchase of essential commodities and furthering of its forex.
The economic crisis of Sri Lanka is not merely an economic issue today. In geo-political terms, its actions and policies are certain to affect relations between India and China, the most powerful Asian powers. Its strategic location for petroleum trade, close to India’s Andaman’s military base and the tense south China Sea, the greater awareness on the issue of Chinese debt trap diplomacy and how Sri Lanka recovers its economy or gets more entrapped in it, could also provide lessons to a good number of countries involved with the Chinese BRI strategy.