Worldview with Suhasini Haidar | How can India help Sri Lanka?

Worldview with Suhasini Haidar | How can India help Sri Lanka?

This week on Worldview, we discuss Sri Lanka’s economic crisis and how India can help its neighbour

Scenes from Colombo just outside the President’s House stunned all last week- as protesters vented their anger over the economic situation they blame the Rajapaksa government- led by President Gotabaya and his brother Prime Minister Mahinda Rajapkasa for. The worry for both Sri Lanka, as well as India and the regional economy- is Sri Lanka’s economy headed for a crash?

Lets just take a look at what fuelled the rage:

1. Sri Lanka’s food inflation in March rose to 30.2 percent- over prices one year ago. Just as examples, the price of rice, has increased by 93 percent since 2019. Chicken and lentils have gone up by at least 55 and 117 percent, respectively, since 2019.

2. Fuel prices and fuel shortages: In March the Ceylon Petroleum corporation quadrupled the cost of Petrol and Diesel with Petrol going from 77 Sri Lankan Rupees to Rupees 254 overnight. An Indian credit line for fuel purchases is set to end at the end of the month, and all diesel supplies may run out after that.

3. Sri Lankan Rupees plunged to become the world’s worst performing currency after the central bank devalued it by 15% in March, and it has since dropped from 200 rupees down to 310 rupees to the Dollar, about 400 rupees on the black market

4. With the country’s debts mounting past $51 billion, with about $ 7 billion due this year, there is a real worry of a debt default, which could send the economy into a further free fall.

5. Sri Lanka’s major wage earners, tourism, export and worker remittances, have been in a downward-spiral for some time. The Easter bombings, the COVID-19 pandemic, and now the shortages, economic strife and political instability will add to the problem. Remittances from abroad have also dropped 25% due to the global economic downturn, and now the Ukraine war. In addition rising impact of climate change on fishing, as well as the intrusion of Indian trawlers in Sri Lanka’s northern sea, which is another big blow to Sri Lanka’s poorest.

While these are the immediate reasons, there are broader reasons for the trouble:

1. Anger over the family control of the Rajapaksas- until the entire cabinet was dismissed over the weekend, there were 5 Rajapaksas in the Government: 4 brothers President Gotabaya (who is also Defence Minister), Prime Minister Mahinda, Irrigation Minister Chamal, Finance Minister Basil, and PM’s son and Sports Minister Namal Rajapaksa. This has not just led to a concentration of power, but the personal ties between the family has also guided government decisions

2. Populist measures like tax cuts – Personal tax payers were given a 40% reduction in taxes while the VAT taxpayers saw a 70% reduction….and handouts from the government, which were popular in the short term- and helped the Rajapaksas win elections in 2019 and 2020, but became a disaster once other crises hit

3. Poor Policy Planning: A slew of sudden decisions- like the decision to mandate organic farming and ban fertilizer import overnight- has stopped farming on the island where many subsist on agriculture abruptly, adding now to the food shortages- which have hit just as the pandemic did.

4. Badly managed debts and bad luck- About 90% of the new debt accrued in the past 2 years comes from interest on loans that go back several years, including to the time PM Mahinda was President, and then subsequently in President Sirisena’s tenure. Last year, 71% of the government revenue went into paying just the interest accumulated on the debt- and now, as they sit down to discuss debt restructuring with the IMF, Sri Lanka doesn’t have a Finance Minister.

We spoke to The Hindus correspondent in Colombo Meera Srinivasan, and began by asking her what this combination of Populism, Pandemic and poor policy meant for Sri Lankan citizens.

What’s the most difficult thing for ordinary Sri Lankans?

Meera: One thing would be milk powder. Now Sri Lanka doesn’t have a robust dairy production tradition. So they import most of the dairy they consume by way of milk powder, interestingly. Milk powder today is you know, a couple of 1000s more than it was two months ago. And that automatically means children are deprived of that very basic nutrient. And then even rice and dal and different pulses and you know, very, very basic everyday items, fish, chicken, everything is so much more expensive and most people are either foregoing these things or skipping a meal to just cope. People who were having three meals have just one, people who were having milk tea are having plain tea, you know choices these have become almost inevitable now, but we will know the nutritional consequences of this only later on, maybe now people are still somehow struggling and somehow coping but what this means to the larger society’s health and nutrition, especially vulnerable groups, we will know only later.

What do you really think India can do there as food fuel shipments going over? What is it that Sri Lanka really expects from India at this point?

Meera: So as you know, Suhasini, India has extended a $500 million credit line for fuel. And that has been proving quite crucial now, especially because the fuel shortages are continuing. And you’ll still see long queues outside petrol and diesel stations. So the thing is the credit line from India and the consignments that are coming in batches. It might run out by the end of April, according to reports, and there is no indication that the government has any clear plan as to how it’s going to source its fuel going forward. Now, the fuel shortage has caused this massive power breakdown- and We are experiencing anything between seven to 13 hour power cuts every day. And what it does to small enterprises, businesses, people who rely on diesel to run a little business to make a living. So it’s having sort of consequences in very, very different ways. And the other 1 billion credit line that India is about to Operation operationalized soon we hear that the first consignment of rice through that credit line might come this weekend. So that again might help Sri Lanka sustain itself just for about a month or little over that. But after that going forward, they don’t have a plan and I believe there is a desire from the Sri Lankan government and the leadership to seek further assistance from India. But India has said they will stand by Sri Lanka in this calamity, but we don’t know how this might translate to actual assistance.

What is the greatest economic risk for Sri Lanka at present? What is it that they are most concerned about next?

Meera: Think what they ought to be most concerned about is how this current political stalemate has further, you know, worsened economic crisis because the longer they take to sort out the political impasse, it’s going to, you know, take them longer to get to the actual economic crisis with concrete solutions. And as we speak, I mean, as you rightly said, there is mounting anger from citizens across the country and significantly from the south where the Rajapaksa administration draws its core support from right and their demand is very unambiguous, very clear, very loud, they want the president to step out, they want the family to quit office. So, so far, we have not had any indication from the President that he is listening to them, or that he will respond by stepping down. In fact, the country his ministers have told parliament that he will not step down. And he has, on the other hand, invited the opposition to form a caretaker government. But all opposition actors are reluctant to do that. Under his presidency, they see his presidency has has having lost legitimacy in the public eye. So there’s this sort of stalemate.

Amidst this twin crisis for the Rajapaksas, India, that is affected both by instability in the neighbourhood and by the future of projects it has only just signed with Sri Lanka- has taken a number of measures, and could be asked to take more:

1. India has extended support of US $2.5 billion in 3 months- including credit facilities for fuel and food

2. In 3 weeks, the government has delivered more than 270,000 metric tonnes of diesel and petrol, and about 40,000 tonnes of rice under the credit facilities.

3. The Modi government had indicated earlier that it would put off debt repayments throug the Asian Clearing Union until May, and may need to extend this

4. The Tamil Nadu Government has also spoken to the Central government offering to ship essential commodities like rice and life saving drugs immediately

5. In the long term, Indian tourists could be incentivised to travel to Sri Lanka to help revive the industry, with measures like extending LTAs to the neighbour, as well as heping boost Sri Lankan exports with collaborations

India’s neighbourhood is a troubled one, as events in Sri Lanka, also in Pakistan show, these troubles can flare into more instability for the region overnight. It is important that the government’s neighbourhood first policy be bolstered, and ensure that being stakeholders in each other’s success becomes the mantra for a more prosperous and stable subcontinent.

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