Dealing with Sri Lanka

New Delhi should lead the assistance

The president of Sri Lanka, Gotabaya Rajapaksa, has asked the visiting foreign minister of the People’s Republic of China, Wang Yi, for assistance in the face of a possible debt crisis facing the island republic. Fitch Ratings has downgraded Sri Lanka’s debt to the level just above default. Even prior to the pandemic, the country’s foreign debt had reached 42.6 per cent of gross domestic product; and, in November 2021, its foreign reserves reached a low of $1.2 billion, down from almost $8 billion before the pandemic. Between now and October, it has to pay off almost $5 billion in debt, including a sovereign bond payment of $500 million next week. Another $1 billion is due in a lump sum in July. Meanwhile, inflation has crossed 11 per cent, and a ban on the import of certain items in order to preserve foreign exchange has led to widespread shortages in foodstuffs, including milk powder, pulses, and sugar.

It is not surprising that Colombo has turned to Beijing for help in this context. The Rajapaksa family has always had a certain closeness with the Chinese administration, and China is Sri Lanka’s fourth largest external creditor. In December, the People’s Bank of China signed a $1.5-billion currency swap deal with Sri Lanka, which helped foreign exchange reserves recover from the deeply problematic level they had reached in November. Mr Rajapaksa presumably hopes that the Chinese will also restructure some of their debt in Sri Lanka, over $1.5 billion of which is reportedly due this year, to help the country through the storm it is facing. Yet the context is disquieting. Past debt restructuring between these two parties has proved controversial; the Hambantota port was famously handed over on a 99-year lease to a Chinese firm in 2017, as part of such an agreement. Beijing has, however, proved sensitive to criticism that its foreign infrastructure financing as part of the Belt and Road Initiative is “debt trap diplomacy”, so it is unlikely that anything as brazen will be attempted this time around.

Yet from India’s point of view, this situation is far from helpful. A Colombo dependent on Beijing’s goodwill is hardly in India’s interest. Yet it is also true that New Delhi has neither acted with the speed nor at the scale that is required. Sri Lanka has repeatedly asked for at least a $1 billion swap line with the Reserve Bank of India (RBI); the RBI last year renewed a mere $400 million line. A larger assistance package that Sri Lanka has hoped for, in the $1.5-$2 billion range, has been delayed. It still may come about, but making a near and vital neighbour beg in this manner is hardly likely to endear the country to India. It is more likely to embed in the Sri Lankan political class’ mind the theory that dependence on Beijing, even if debt-trap diplomacy, is at least less injurious to national pride than expectations from New Delhi. This is short-sighted behaviour, at the very least. India’s recent management of its neighbours has proved poor — a combination of delay, incompetence, and high-handedness that means relations on most borders are considerably worse today than they were seven or eight years ago. A broader understanding of the national interest must prevail in New Delhi, and Colombo should be encouraged to remember that India is a nearer and easier location for assistance and support than China.