India should come forward to help Sri Lanka – it is in our own interest

Inflation is in the double digits, as is the fiscal deficit as a ratio of GDP. Foreign debt as a percentage of GDP is in the triple digits. Even as Sri Lanka has prioritized meeting its debt servicing obligations to foreigners, Fitch earlier this year downgraded Sri Lanka’s credit rating to CC. The downgrade was from CCC, the speculative grade, at very high risk. CC stands for speculative grade, which is very close to the default. The current account deficit was 3.8 per cent of GDP in 2021.

Why has the Emerald Island lost its luster? Various people parade their pet theories: the switch to organic farming, the tradition of welfare and social sector spending on tough infrastructure, linked to sugar debt, pandemics, corruption, economic mismanagement. The real explanation is perhaps a mixture of all these factors, with decades of violence stemming from majoritarianism as the pervasive shadow that keeps the sun of economic prosperity shining on the ground.

Sri Lanka imports much of its consumption, but has generally managed to pay for its imports with plantation exports, healthy tourism income and a steady infusion of foreign exchange borrowings. Tourism accounts for about 10-12% of GDP. In April 2019, on Easter Sunday, Sri Lanka witnessed a series of bombings at churches where Christian devotees had gathered, and at three luxury hotels in the capital. The death toll stood at 277, including eight suicide bombers. In addition, 500 odd were injured. While the attack was perpetrated by Islamic fundamentalists, and the victims were mostly Christians, the violence revived Sinhala-majority Buddhist fundamentalism, which had been fuel-hungry since the 2009 destruction of the Liberation Tigers of Tamil Eelam. On the strength of this revival, the government changed and Sri Lanka got back the strong rule of the Rajapaksa brothers.

Tourism has been crippled by terrorist attacks. Before the economy could recover from the disaster, the cut in the value-added tax caused a drop in revenue rather than a boost to economic activity, knocked out the next year by the pandemic. The economy shrank, the government responded with effective vaccinations, welfare handouts, a fiscal deficit of more than 10% of GDP and an easy money policy. The economy recovered somewhat in 2021, but tourism remained depressed, the current account widened and inflation climbed.

When foreign exchange dwindled, the government discovered the merits of organic farming: avoiding fertilizer imports was, of course, only an ancillary advantage. Organic farming is like a garnish, not a substitute for the main dish. Less use of pesticides and farming without the use of fertilizers led to a decline in agricultural production, not to mention productivity. This increased dependence on imports for basic consumption, which intensified the external payment crisis.

China’s desire to deploy its ever-accumulating current account surplus into real assets, rather than financial assets overseas, was a key driver of its Belt and Road Initiative, through which it hoped to build a new Silk Road. , with which it can be carried forward. The never-ending stream of exports (in 2021, sugar exports totaled $3.36 trillion). In 2010, with a former Rajapaksa government, the Chinese entered into an agreement to invest to develop a port at Hambantota on the southern coast of Sri Lanka. The port was built by 2017, but the total cargo volume was not sufficient to service the capital invested, and the Chinese liquidated majority (70%) ownership of the port.

Rajapaksa’s fascination for China’s silk promises has not diminished. In its current proposal to create a new Exclusive Economic Zone, by reclaiming a few hundred hectares from the Indian Ocean adjacent to the Colombo port, the government has handed over a major portion of Colombo Port City’s 266 hectares to the Chinese. 99 year lease. Concerned Sri Lankans are trying to find out whether this would create a one country, two systems, structure in Sri Lanka, with extra-territorial powers on its leased territory to Beijing, a reclaim of the Indian Ocean adjacent to Colombo. Part.

It does not make sense for India to allow China to occupy an expansive part of Sri Lankan territory. India should offer financial assistance, policy advice and investments to Sri Lanka from Indian entrepreneurs. Indian businesses must build supply chains that link the Indian and Sri Lankan economies in goods and services ranging from tea exports to information technology services.

The Sri Lankan crisis offers a few lessons: for a ruthless majority to persecute a small minority (15% of the population of Sri Lankan Tamils), is to lose opportunities for economic growth, internal solidarity, civil unrest and a global outcry. Ultimately, opportunities for economic growth are lost through avoidance. Capital; Over-reliance on an external beneficiary ends up in a debt trap, in which you surrender sovereignty in dibs and dabs; It is best to increase domestic tax revenue and reduce government spending, especially government borrowing from external sources, to limit borrowing.

Sri Lanka has some advantages, whose potentially positive economic benefits have so far been thwarted by divisive politics and economic mismanagement: high human development and upgradeable skills. India, rather than any other country, should help Sri Lanka realize its potential to reap the rewards of a stable, friendly neighbourhood.