Sri Lankan Economic Woes and Chinese Help

 By Alakh Ranjan
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The Chinese footprint has been growing in South-Asia in recent years. It has been applying smart power diplomacy i.e. a combination of hard power (loan, aid, and grants) and soft power (tourism, scholarships, and political interactions) in this region. The Chinese have boosted the level of engagement in the neighbourhood to strengthen its position in the region during the pandemic. It has been supplying medical equipment, dispatching medical teams to help doctors in Pakistan, Nepal, and Bangladesh to fight the pandemic, etc. It has also lent economic support to the countries as per their needs. After announcing a loan of USD 250 million through AIIB and ADB and a tariff exemption for import of 97 percent of Bangladeshi, it has come to Sri Lanka’s aid.

Debt Dilemma

Sri Lanka is in deep trouble and is fighting problem on two-fronts, which is its economy and pandemic. Its foreign debts were rising before the pandemic and COVID-19 has further added to this problem. Even before COVID-19, the gross domestic product (GDP) of the country has been falling in the last five years and was growing at 2.2 per cent which has resulted in the government taking loans from foreign government and agencies to fund the development projects. The problem of foreign debt on the loan had been rising for Sri Lanka over the years.

In the last decade, the country debt has almost tripled and the major contributor to this has been China whose share in total debt is 14 percent.[i] In 2019 the total foreign debt was reported to be approximately USD 55 billion which is around 80 percent of its GDP.[ii] This year the country had to make a debt repayment of USD 4.8 billion.[iii]

Sri Lankan Prime Minister asked for India’s help and during his visit to India in February PM Mahinda Rajapaksa had requested a debt deferment. In May, the Central Bank of Sri Lanka also requested a currency swap for USD 400 million to Reserve Bank of India but any action on this has taken place. But no major progress happened on both issues till now. With no concrete action taken by India, the island nation turned to China and the Chinese responded promptly. The China Development Bank signed an agreement with Sri Lanka for a loan of USD 140 million to fund its debt repayments.[iv] It also granted an urgent loan of USD 500 million to Sri Lanka to fight the impact of COVID.[v]

Tourism Trouble

The pandemic will majorly impact the tourism industry of Sri Lanka which is a crucial sector. The industry contributed 12.5 percent [vi] to its total GDP and also generated close to four lakhs employment (directly and indirectly) in the year 2018.[vii] According to the latest World Bank Report, it has been forecasted that the growth of the island nation in the coming months will be between -3 percent to -0.5 percent for 2020.[viii] The primary reason for this slump in the economy will be due to the impact of COVID-19 on the tourism industry.

The sector has already seen a dip after the Easter attacks and was on its road to recovery and was expected to grow this year. But COVID-19 put permanent brakes on it which will hugely affect Lanka’s economy. Even though Sri Lanka has been able to control the spread of COVID-19 in its country with only 189 active cases and 11 deaths till 5th July[ix] but the three major countries (India, China, and the United Kingdom) from where the majority of the tourist come to Sri Lanka are still battling the pandemic. It is tough to contemplate that when international travel tourism will start to visit in Sri Lanka. The tourism industry revival looks grim in the current year and Sri Lanka will have to find other ways to put its economy back on track.

The window of Opportunity for India

Sri Lankan economy is going through its toughest phase. With the value of its domestic currency falling from 181.3 rupees in January to 199.7[x] to a dollar in April and foreign reserves falling to USD 6 billion in May. The country is looking for external help. The Chinses has been at the forefront to help Sri Lanka through economical and medical aid. Sri Lanka has also reached out to other countries and international organizations for economic help. The European Union has promised a grant of USD 24 million to support Sri Lanka.[xi]

India has helped Sri Lanka in its fight against the pandemic. It sent a 10-tonne  consignment of medicine in April but the slow response on the economic front is worrying. In his latest statement, the Indian High Commissioner to Sri Lanka has promised to help Sri Lanka’s economic recovery. Although no concrete announcement has been made. Slow response rate and delivery-deficit have been the main complaint of the South Asian countries towards India. This has cost India a lot in the past and with prompt Chinese response in the region, India needs to do away with these two issues if it wants to remain a major player in the region.

Sri Lanka needs money for its economic revival and China has been lending loans to them. The loans will solve the Sri Lankan woes temporarily and will increase to Sri Lankan debt. The present economic situation presents a window of opportunity for India to give aid and investments to the island nation. Sri Lanka is located in a crucial position in the Indian Ocean region (IOR). Losing it to China will have an impact on India’s position in South-Asia and its role in the IOR. Prime Minister Modi has himself highlighted that “stability security and prosperity in Sri Lanka is not only in the interest of India but also in the interest of entire IOR.”[xii] India should partner will Japan and the USA and develop a road map for a sustainable economic revival of the island nation. This will help in enhancing India’s position in Sri Lanka and generate a positive image that will surely benefit it in the coming years.

End Notes

[i] Suhasini Haider, Meera Srinivasan, “With India yet to respond on debt freeze request, Sri Lanka turns to China, The Hindu, June 27, 2020, Available on Internet at: https://www.thehindu.com/news/international/four-months-on-sri-lanka-still-waits-for-indian-decision-on-debt-moratorium/article31934947.ece, Accessed on July 1, 2020.

[ii] CEIC, Sri Lanka External Debt, Available on Internet at:   https://www.ceicdata.com/en/indicator/sri-lanka/external-debt#:~:text=Sri%20Lanka’s%20External%20Debt%20reached,USD%20bn%20in%20Dec%202012. Accessed on July 3, 2020.

[iii] Munza Mushtaq, “Sri Lanka piles on more Chinese loans amid virus and debt crisis” Nikkei Asian Review, May 15, 2020, Available on Internet at:   https://asia.nikkei.com/Politics/International-relations/Sri-Lanka-piles-on-more-Chinese-loans-amid-virus-and-debt-crisis, Accessed on July 2, 2020.

[iv] “Sri Lanka to obtain USD 140 million loan from China Development Bank” News 1st, July 1, 2020, Available on Internet at: https://www.newsfirst.lk/2020/07/01/sri-lanka-to-obtain-usd-140-million-loan-from-china-development-bank/, Accessed on July 2, 2020.

[v] Ibid

[vi] World Data Atlas, Sri Lanka- Travel and Tourism Total Contribution to GDP, 2018, Available on Internet at:https://knoema.com/atlas/Sri-Lanka/topics/Tourism/Travel-and-Tourism-Total-Contribution-to-GDP/Contribution-of-travel-and-tourism-to-GDP-percent-of-GDP#:~:text=Sri%20Lanka%20%2D%20Contribution%20of%20travel,as%20a%20share%20of%20GDP&text=(%25)%20in%202018-,Sri%20Lanka%20contribution%20of%20travel%20and%20tourism%20to%20GDP%20(%25,up%20from%2011.7%20%25%20previous%20year., Accessed on July 4, 2020.

[vii] Sri Lanka Tourism Development Authority, Annual Statistical Report, 2018, Report on Sri Lanka’s Tourism, Page No.6, Available on Internet at: https://sltda.gov.lk/storage/documents/0cb228cd03762f638bd515fe83edd453.pdf, Accessed on July 5, 2020.

[viii] World Bank-Press Release, “South Asia must Ramp up COVID-19 Action to Protect People, Revive Economy”, April 12, 2020, Available on Internet at: https://www.worldbank.org/en/news/press-release/2020/04/12/south-asia-must-act-now-to-lessen-covid-19-health-impacts, , Accessed on July 5, 2020.

[ix] SAARC, COVID-19 Situation Report 108, 2020, SAARC Disaster Management Centre (IU), 2020, Report on the situation of COVID-19 in South Asia region, Available at: http://www.covid19-sdmc.org/sites/default/files/situtation_report_document/situation-report-05-07-20.pdf, Accessed on July 5, 2020.

[x] Central Bank of Sri Lanka, Exchange Rate Movement- Rupees per USD, Available at: https://www.cbsl.gov.lk/en/rates-and-indicators/exchange-rates/usd-lkr-Indicative-rate-chart, Accessed on July 2, 2020.

[xi] Press Release, European Union, “Covid-19: European Union provides EUR 22 million grant to Sri Lanka” April 9, 2020, Available at: https://eeas.europa.eu/delegations/sri-lanka/77364/covid-19-european-union-provides-eur-22-million-grant-sri-lanka_en, Accessed on July 5, 2020.

[xii] Speeches and Statements, Ministry of External Affairs, India, Press Statement by Prime Minister during the State visit of Prime Minister of Sri Lanka, February 08, 2020, Available at: https://www.mea.gov.in/Speeches-Statements.htm?dtl/32382/Translation+of+Press+Statement+by+Prime+Minister+during+the+State+Visit+of+Prime+Minister+of+Sri+Lanka+to+India, Accessed on July 5, 2020.