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Sri Lanka economic crisis:

GS Paper 2:

Topics Covered: India and neighbourhood relations.

 

Context:

Sri Lanka is undergoing an economic crisis.

 

Present situation:

  • There is a severe shortage of foreign currency in the country.
  • The Sri Lankan government is unable to pay for essential imports, including fuel.
  • This has led to debilitating power cuts lasting up to 13 hours.
  • Ordinary Sri Lankans are also dealing with shortages and soaring inflation.
  • The country was left with only $2.31 billion (as of February) in its reserves but faces debt repayments of around $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July.

 

Factors leading Sri Lanka to this situation:

Economic mismanagement by successive governments: This created and sustained a twin deficit – a budget shortfall alongside a current account deficit.

Populist policies of the current government: For example tax cuts.

Impact of the pandemic: Reductions in the country’s vital tourism economy and remittances from foreign workers.

Reduction in rice production: Caused by the present government’s proposal to ban all chemical fertilisers in 2021, which was later reversed.

 

Support from India:

  • A diesel shipment under a $500 million credit line signed with India is expected to arrive in Sri Lanka soon.
  • Sri Lanka and India have signed a $1 billion credit line for importing essentials, including food and medicine.
  • The Sri Lankan government has also sought at least another $1 billion from New Delhi.

 

Why Helping Sri Lanka is in India’s Interests?

Crucially, any disillusionment in Sri Lanka with China eases India’s effort to keep the Lankan archipelago out of China’s ‘string of pearls’ game in the Indo-Pacific.

  • It is in India’s interest to contain Chinese presence and influence in this region.

 

Insta Curious:

Do you know about the UN World Food Programme, the world’s largest humanitarian organization? Reference.

 

InstaLinks:

Prelims Link:

  1. About the Sri Lankan economic crisis.
  2. Line of Credit.
  3. IMF.
  4. Twin Deficit.
  5. Balance of Payments.

Sources: Indian Express.