Talk on Evolving Situation in Sri Lanka

The Vivekananda International Foundation organized a talk on Economic Situation in Sri Lanka on 18 May 2022. The talk was chaired by Dr. Arvind Gupta, Director, Vivekananda International Foundation

The economic situation in Sri Lanka is an evolving situation with multiple layers including social, political, and economic. Although the situation changed suddenly, the crisis was visible at the economic level since COVID-19. The mishandling of the economy resulted in the shortage of fuel, fertilizer, and liquid forex reserves. There are more than 15 hours of power cuts which have not been the case in the past. Other indicators were reflecting Sri Lanka’s economic crisis, especially the downgrading of its status from Middle Income Country to a lower category. However, the central point of these crises has been the policy-level decisions taken at the leadership and government levels.

For instance, in 2019 soon after a new Government was formed, the government provided tax holidays, and VAT was reduced. Tourism and remittances were in disarray due to COVID-19 which took a hit on the economy. The currency has been devalued as a result of the present crisis and to make the payments to get essential supplies, the government is reportedly printing currency without enough gold and foreign currency reserves. Also, due to the high inflation, the purchasing power had gone low, and lack of employment has further added to the agony.

To address the current crisis, the Sri Lankan Government had been trying to negotiate loans with the International Monetary Fund (IMF) where 16 Rounds of Talks have already taken place and the country is trying to conclude the talks to enter into a staff-level agreement and debt restructuring negotiations. There are also hopes for other agreements to take place with the World Bank.

At the home level, privatization of public undertakings including Sri Lankan Airlines is being processed which the Prime Minister himself has spoken about. Meanwhile, structural reforms are the need of the hour but it is going to be a big challenge considering the political deadlocks and prospects of new elections that may take place once the current government enters its half term.

In terms of India’s role, since January 2022, it has extended a support package worth USD 3.5 billion. Out of which, USD 1.5 billion are given in the form of two Lines of Credit (LoC), USD 500 million for Fuel extended by the EXIM Bank of India. Eleven consignments of the fuels have been delivered. An LoC worth USD 1 billion has been extended by the State Bank of India out of which USD 200 million is meant for fuel. These fuel supplies to Sri Lanka will last till mid-June. The other LoC worth USD 1 billion has been given for the food and medical supplies. Sri Lanka has also requested an additional LoC worth USD 500 million from the EXIM Bank of India which is in the process. Another USD 2 billion USD support has been extended by the Reserve Bank of India in the form of Currency Support where USD 400 million is meant for the Currency Swap. USD 1.5 billion under ACO performance deterrence and the net support is close to USD 4.5 to USD 5 billion.

India’s assistance and support have been hailed across the world for being neighbourly and people-oriented. It is the people of Sri Lanka who have been in the queues for the supplies of petroleum products and India has come forward to supply that to them. Despite there were efforts to allege that India will be sending its troops which the Embassy has refuted and condemned. Amidst this, India has won the goodwill of the people of Nepal and India should continue to extend all possible support to Sri Lanka.