As China fishes in Lankan waters, India must weigh the costs and benefits of bailing out its neighbor

Much has been written about the economic crisis in Sri Lanka and most of it ends up blaming the incumbent government of President Gotabaya Rajapaksa and ruling out the role of previous regimes since the country’s independence in 1948. The question is whether India would bail out the southern neighbor, why and how.

Sri Lanka’s economy was designed to implode from time to time, and it has happened every time. Unlike previous occasions, this time around the global COVID-19 pandemic has hit the forex-centric economy so hard that it will continue to take its toll for years and decades to come, even as it overcomes the current crisis.

Living beyond your means is the cause of the country’s economic crisis. Add to that the intersection of Western socialist and capitalist models with each change of government, and the recipe for disaster was certain. In a way, it wasn’t even a hybrid model as you might expect. Suffice to say that the socialist model in its first avatar has nationalized everything in sight. The return of the capitalist model in the 1970s led to the very importation of powdered milk and fruit into what is still essentially an agrarian economy.

Successive governments could play with the economy as long as income from tourism and remittances from Sri Lankan labor to the Gulf as well as home helpers and trained nurses in Europe continued to arrive. COVID-19 suddenly put an end to it. Two years earlier, in 2019, the serial Easter explosions, which killed 269 people, including at least 40 foreigners, had already killed the tourism industry.

To all of this was added the protracted political crisis, at the center of which were former President Maithripala Sirisena and his still distant Prime Minister Ranil Wickremesinghe. The Constitution gave the upper hand to Sirisena, but the people’s tenure gave more parliamentary seats to Wickremesinghe, for what on paper remained a coalition government. Rather than exposing the corruption and scams of the Rajapaksa government, predecessor of war-winning President Mahinda Rajapaksa, the ruling coalition, fancifully calling itself the Government of National Unity (GNU), engaged in tax scandals equally important.

Rajapaksa contribution

It is not as if the Rajapaksas have not done enough to ruin the economy which was already in an irretrievable position. Rather than tighten his belt, Mahinda as president (2005-15) opened the floodgates on government spending, constrained as he was by what his advisers saw as a wartime need to keep the people on. the government.

Thus, the number of government jobs further doubled to around 1.3 million, after being drastically reduced between the two by political rivals while he was in power. Identifying the neglected rural masses as a traditional constituency in real need of help, the Rajapaksa government then built roads and large-scale electrified Sinhala Buddhist villages in the south.

Then there was the ubiquitous hand of China, starting with the much-publicized Hambantota Port Construction-Concession, which the Sirisena-Wickremesinghe duo (2015-19) converted into a 99-year lease, but the Chinese debt relief promised did not appear to have taken place. The government also continued to borrow more from China, for the creation of massive road infrastructure that could have waited or spread over years and decades.

Worse yet, for the billions of debts incurred, the Chinese design has not provided jobs for millions of Sri Lankans, nor a boom in the local infrastructure industry, such as cement factories. As elsewhere and unlike India, the Chinese brought their equipment and construction materials as well as labor. In economic terms, all the money in debt went back to China, one hundred percent, with only economically unproductive infrastructure to remind the nation of its debt. No one wanted to be reminded of it, and no one remembered it.

To this, outgoing President Gotabaya Rajapaksa, who was elected for a five-year term in 2019, has made his own contribution. As if to cover up the looming forex crisis, made worse by the COVID pandemic, it has sugar coated a disastrous step of stopping imports overnight by talking about “organic farming” – but without taking the first steps and precautions required.

While the import ban has affected most other industries and supplies, including pharmaceuticals, the sudden switch to organic farming with no stocks on hand to supply the country’s farmers has turned a stone involuntary two strokes. First, the agricultural industry, including the currency-earning tea trade, is in the throes of a slump. Second, there is no food on the plate for the common man, transcending classes, castes and ethnicities.

It started with South Asian turmeric, which was once imported from India, but then included equally essential sugar and rice. At one point, Gotabaya ordered a “food emergency” and a military veteran called in to head the civilian supplies network pulled out huge stocks accumulated by black merchants. Once this phase was over, everything was back to square one.

Worse was the realization later that behind Gotabaya’s ‘bold and innovative’ organic farming project was a secret deal to import massive amounts of organic fertilizer, yes, from China, which was however rejected. by its own agro-scientists as unsuited to local conditions. After an open discussion in which the Chinese Embassy in Colombo announced that a government bank had been blacklisted for failing to honor supplier bills, the Gotabaya government has since decided to pay a whopping sum of more than 6 million dollars, that too in these times of paralyzed currency crisis.

Not self-sufficient

It is undeniable that borrowing almost tripled during Mahinda’s first term (20015-10). However, there was no “war crisis” after 2009, when the LTTE was routed; no successor government has compiled the economic benefits of the ten-year-old peace. There is a national economic crisis that goes beyond the Rajapaksa label for which a lasting solution can exist in a new economic approach that harnesses the inherent local advantages to meet ever expanding national aspirations in the ever-expanding social media age. more informative.

It is up to Sri Lanka and the Sri Lankans to take care of it. The immediate question is what can India do as a great neighbor in every sense of the word, including the economy. There are also structural problems here, unlike China, which only started to extend its economic arm after deepening its pockets. Not only Sri Lanka, all of India’s neighbors, including opposing Pakistan, are not economically viable entities if their national ambitions and individual aspirations were to be met.

India, although it appears relatively larger and stable in economic terms, is still a developing country. He must measure what he can bring to others and also assess the return on investment at every moment. In the case of Sri Lanka and the others, New Delhi has used China’s strategic intrusion as a give and not to give measure. We still have to find the right timing. With the result, there is always the anticipation that lurks, and if the recipient government still swears by Chinese strategic interests, albeit surreptitiously.

So far, India has reached an agreement with Sri Lanka on the Trincomalee oil tank farms, in exchange for funds that could meet Colombo’s immediate foreign exchange needs. But this nation will need a lot more in the new year, having to repay $ 7.5 billion in contributions to debtors and investors in Treasury bonds. Now that the third wave of COVID has hit the world – it’s a fourth and in some places a fifth wave in Sri Lanka – there is little to no hope that the Sri Lankan economy will recover soon. , not to mention the stimulus.

What India has thus gained through the Trinco Agreement is only a tactical advantage on Trinco’s Sri Lankan front. The ruling Rajapaksas in particular have declared their intention not to approach the IMF for fear that accepting their conditionalities will make their government unpopular with the masses (not that they will no longer be popular). Instead, they are ready to promise Sri Lankan sovereignty and territory because they are not registered as voters.

A clearer picture will emerge when Chinese Foreign Minister Wang Yi visits Colombo later this week (January 8-9). Besides extending a much needed $ 1.5 billion currency exchange, but only after as much of a delay as India’s, China can now be expected to fish even more in the waters. Sri Lanka unrest. It is not yet known what China has to offer and what more it expects from Sri Lanka, but it appears to be the only source of external currency for Colombo at this time.

The reasons are not far to seek. Insane local currency printing over the past month pushed monthly inflation up 13% in December 2021, with food inflation reaching a record high of 22.1%. It cannot continue. Either way, restrictions on remittances through private money changers have not helped boost reserves to heartwarming levels.

This is where the clue lies and also the hitch for New Delhi. It must reflect on its “neighborhood first” policy to give real meaning to everything that is happening in the medium and long term.

The author is Distinguished Fellow and Head-Chennai Initiative, Observer Research Foundation. The opinions expressed in this article are those of the author and do not represent the position of this publication.

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