Sri Lanka is on the edge of the precipice even as it just managed to ward off a sovereign default a few days back. It paid off $500 million due on sovereign bonds from its reserves of just over $3 billion. These reserves, which include a currency swap in Chinese currency amounting to $1.5 billion, are now barely enough to cover 45 days’ imports. Meanwhile, its external debt stock amounts to about 61 per cent of the GDP, or about $34 billion. To put these figures in perspective, India’s forex reserves at $634 billion are sufficient to cover nearly 13 months of imports; its external debt at about $570 billion, was 21.1 per cent of GDP on March 2021. Sri Lanka’s precarious forex reserves have brought upon a food crisis, with the island nation being unable to meet its food import requirements. This has pushed up the prices of essentials. Amid fears of an imminent sovereign default — Sri Lanka must service $7 billion outstanding debt in 2022 — pressure is being brought on the government to approach the IMF for a relief package. But the ruling dispensation has resisted this option and apparently worked out an alternative strategy — one based on securing bilateral credit and currency swaps.
India has stepped in here by confirming a $400 million currency swap, while deferring another $500 million due for settlement. Besides China, which has arguably ensnared (some would say ‘colonised’) Sri Lanka in a debt trap by building its Hambantota port, South Korea and Bangladesh are involved in extending credit lines and debt restructuring. This acute crisis could lead to Sri Lanka pivoting away from China towards India, if India plays its cards well. China has extended Covid relief amounting to about $2 billion through loans and currency swap deals, besides owning debt over $3.5 billion. It was Sri Lanka which had sought China’s involvement in the port project, providing China undue influence in India’s backyard. Now, with its BoP crisis worsening, Colombo has been forced to reach out to New Delhi.
India was initially neutral to Prime Minister Mahinda Rajapaksha’s public appeal for a three-year debt moratorium during his visit to New Delhi in February 2020. Since then, India has come around to extending a four-pronged package — a line of credit for fuel imports, early finalisation of the joint Indo-Sri Lanka development plan for the Trincomalee oil tank farm, an offer of a currency swap and facilitation of Indian investments. India perhaps cannot match China’s resources, but can leverage its geographical proximity and cultural affinity to loosen China’s grip on the island nation. India is probably justified in being miffed over the current Sri Lankan dispensation’s tilt towards China, but the best way to correct that will be by stepping in to help the island nation in its hour of need.