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Context

• Amid the ongoing crisis in Sri Lanka, its Central Bank chief warned of economic collapse unless the political stability is urgently restored and a new government is appointed to run the crisis-hit country.
• The chief pointed toward the dire situation of the island’s economy, which crashed after the Balance of Payments issue over the last two years which led to a severe dollar crunch.

How Sri Lanka Fell into Economic Crisis

• Since Sri Lanka’s independence from Britain in 1948 there were a lack of foreign currency.
• The country cannot afford to pay for imports of staple foods and fuel.
• The country’s inability to pay for necessities leads to acute shortages and prices to record highs.
• The root crisis of the present crisis lies in the economic mismanagement by successive governments that created and sustained a twin deficit of budget shortfall alongside a current account deficit.
• With the country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic, credit rating agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets.
• The government’s ban on chemical fertilizers last April as it looked to become the first country to fully adopt organic farming backfired. A survey showed that 90% of Sri Lanka’s farmers used chemical fertilizers for cultivation.

India on Sri Lankan Economic Crisis

• India has extended financial assistance to the tune of $2.4 billion in the last three months to Sri Lanka, which includes a $400 billion RBI currency swap, deferral of a $500 million loan and a $1.5-billion credit line for importing fuel, food and medicines.
• India, as a close neighbour of Sri Lanka, with historical ties, is fully supportive of its democracy, stability and economic recovery.
• India will continue to provide Sri Lanka with economic support but not political support during the current crisis, prioritizing people-to-people ties instead.

Impact on India

• Thousands of containers sent from India to Sri Lanka, including for its consumption as well as trans-shipment cargo, have been lying uncleared at Colombo port as authorities can’t afford to transfer containers between terminals.
• India also relies considerably on Colombo port for global trade given it is a transhipment hub. 60% of India’s trans-shipment cargo is handled by the port.
• India has traditionally been among Sri Lanka’s largest trade partners. Before the pandemic, India was the top tourism source for Sri Lanka. More than one-fifth of Sri Lanka’s total imports come from India.
• India is also one of the largest contributors to Foreign Direct Investment in Sri Lanka.
• it is a geopolitically important country and India needs to counter the growing Chinese influence on its economy.

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