Changing dynamics of Sri Lanka’s fiscal woes
The Covid-19 shock faced by Sri Lanka, a country spoilt by living beyond its means under the Rajapaksas, forced it to sound the IMF bugle last week amidst unprecedented hardships faced by the common Lankan. Equally unprecedented were protests calling for President Gotabaya Rajapaksa to resign: ‘Go Gota go’. This was the second shock for the Rajapaksa clan which has ruled Sri Lanka for the last four decades with one spell of a disastrous National Unity Government (NUG). Two brothers as President and Prime Minister is a rarity, but the elder Mahinda as President and Gotabaya as Defence Secretary won the 30-year-long war in 2009, defeating Prabhakaran’s legendary LTTE. From then on, the Rajapaksas could do no wrong till Mahinda from his four Ds replaced ‘Democracy’ with ‘Development’ in the North. But the focus of development was in his home constituency in the South where in the words of Foreign Minister S Jaishankar, ports were built where no ships berthed and an international airport where no aircraft landed, driving the country into China’s debt trap — debt into equity.
The West-India-plotted experiment of an NUG ensured the Rajapaksas were dethroned but only just. The mishandling of the Easter Sunday terrorist attack in April 2019, which resulted in the death of 270 people, paved the way for the return of the Rajapaksas with a two-thirds majority. With the country facing its worst economic meltdown in history, India-China see-saw diplomacy has turned to India’s advantage. Sri Lanka is also facing its worst humanitarian crisis and last August declared an emergency in face of an acute foreign exchange crunch which led to food and fuel price rise as well as crippling power cuts. Last week, protesters jammed the iconic Galle Road, demanding Gotabaya’s resignation. Gotabaya was once a national hero as the chief architect of the war victory. India’s erratic behaviour during the war deprived it of the credit it deserved in shaping the Rajapaksa victory. Instead, China and Pakistan stole the limelight.
Last week, Gotabaya dispatched another brother, Finance Minister Basil Rajapaksa on his third visit in 12 months to India to salvage the domestic crisis. India agreed to provide another line of credit worth $1 billion. This year, India has extended loans worth $1.4 billion of which $400 million is currency swap; $400 million deferral line of credit and another
$500 million as credit for fuel imports. Sri Lanka’s devalued currency is worth SL Rs 265 to a USD. New Delhi hailed its Neighbourhood First policy and pledged to stand with Colombo. Strategic Indian projects on hold by Sri Lanka were revived — the solar power plant in Sampur, south of Trincomalee harbour, refurbishing Trincomalee Oil Tank Farm and upgrade of Palaly airport and Kankesanthurai (KKS) harbour in Jaffna. The Sri Lankan opposition is accusing the Adani group of ‘back-door entry’ into energy sector as pampering ‘PM Modi’s notorious friends’.
The question on everyone’s lips was will Colombo seek IMF help or not. The inveterate Governor of Sri Lanka’s Central Bank, Ajith Nivard Cabraal was in a public tussle with Finance Minister Basil Rajapaksa, arguing that better times were around the corner. But credit rating agencies and financial pundits had declared Sri Lanka bankrupt as it owed more foreign exchange than it had. Finally, Gotabaya succumbed to public pressure and announced that negotiations with the IMF would start in April.
The financial balance sheet is distressing. Colombo’s debt is amounting to $22 billion whereas projected earnings from exports are $12 billion. Its earnings are $3 billion from tourism, $2 billion from remittances and another $2.5 billion from grants and assistance. The government has to pay $7 billion for loans and repayment of sovereign bonds. The treasury’s net deficit is $9.4 billion in foreign exchange, money it just does not have. Gotabaya is a soldier with little knowhow of economics. Retired military Generals and equivalent in other services are commanders of several task forces and two are defence and foreign secretaries. Two Generals are accused of war crimes and have notices issued against them. Still, Gotabaya stands tall among his military constituency. He has appointed a National Economic Council and an Advisory Committee to tide over the national crisis. But the country’s fate is being regulated by external factors, including the war in Ukraine. Tourists from Russia, Ukraine, Belarus and Poland constituted 30 per cent of inflow and Russia was one of the biggest buyers of Sri Lankan tea. These would all be affected by sanctions.
China, Sri Lanka’s other brother (India is a blood relative), has been mealy-mouthed in extending help. Foreign Minister Wang Yi was in Colombo earlier this year to mark the 65th anniversary of diplomatic relations between the two countries. Sri Lanka requested China to restructure debt repayment and a concessionary credit facility for imports. But Beijing, fearing it might set a precedent for other debt-distressed countries, has not acted. But it is considering an LOC of $2.4 billion, its Colombo embassy announced on Monday.
Colombo is scheduled to host the BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) on March 30 which both Jaishankar, an old Sri Lanka hand, and Prime Minister Modi are likely to attend or address. Colombo will be keen to show its business as usual despite its financial woes. New Delhi has recovered much ground in the island-nation that it had conceded to Beijing. The power game is unending.
