Handling Sri Lanka in time of crisis – UPSC GS2

Context: Sri Lanka is facing a debt crisis and it has asked for assistance from China.
Reason of Sri Lanka’s economic crisis:
  • Fitch Ratings has downgraded Sri Lanka’s debt to the level just above default.
  • Country’s foreign debt had reached 42.6 per cent of gross domestic product. It has to pay off almost $5 billion in debt before October.
  • Foreign Currency reserve of Sri Lanka has reduced from $8 billion before the pandemic to a low of $1.2 billion. It has to ban the import of certain items to preserve Foreign Currency.
  • High Inflation (11%), along with restriction on imports has led to shortage of food items.
Why Sri Lanka has turned to China for assistance?
  • Closeness of Sri Lankan President Rajapaksa family with China.
  • China is fourth largest external creditor of Sri Lanka.
  • People’s Bank of China’s $1.5-billion currency swap deal helped Sri Lanka in preserving its Foreign Exchange reserves.
  • It is notable that the Hambantota port was famously handed over on a 99-year lease to a Chinese firm in 2017 under the debt restructuring agreement. However, China has shown sensitivity to the criticisms of its foreign infrastructure financing as a “debt-trap diplomacy”. So, Sri Lanka is expecting debt restructuring from China over its $1.5 billion debt, which is due this year.
Why India has not been asked for help?
  • On the other hand, India has not acted with the required speed and scale.  For example, the RBI last year renewed a mere $400 million swap line to Sri Lanka, in comparison to its repeated request for at least a $1 billion swap line.
  • Delaying the request for assistance is likely to push Sri Lanka towards China, which has been more responsive with lesser efforts.

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