Amidst economic turmoil and strategic shifts, delve into how India's intervention rejuvenated Sri Lanka, redefining regional alliances post-conflict.
by Ashok K. Mehta
India is being hailed as Sri Lanka’s saviour following its economic meltdown last year by providing a lifeline of USD 4 billion. It turned out to be a great opportunity to restore trust with the Sinhalese after decades of civil war. The Sri Lankan Army won a magnificent victory against the Tamil Tigers in 2009, significantly aided by India, ironically by the latter not intervening and providing valuable intelligence about LTTE replenishment and logistic ships at sea. Not even grudgingly did Sri Lanka formally acknowledge the intelligence provided, so peeved was Colombo with New Delhi for propping up Prabhakaran and his deadly LTTE. The level of distrust built up over three decades of ethnic conflict and India’s involvement in it, including the 30-month intervention by IPKF, was staggering but necessary for national security. The defeat of the LTTE on 18 May 2009 was a turning point in Sri Lankan history. Sometime later, Sri Lanka’s top leaders said, “For our security, we look to India, a relative; for economic assistance, we turn to China, a friend.” Just the opposite happened last year.
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| Indian Prime Minister Narendra Modi (right) welcomes Sri Lankan President Ranil Wickremesinghe in New Delhi, India, Friday, July 21, 2023. [AP Photo/Manish Swarup] |
Fast forward to 2022. The green shoots of economic collapse were visible when President Gotabaya Rajapaksa was elected on a security plank following the Easter bombing. His brother, President Mahinda Rajapaksa, who was defeated in elections in 2015 and was later Prime Minister, had spent beyond the country’s means on development after winning the war. He thought that development could replace the devolution of power (13A) for the Tamils in the Northern and Eastern Provinces, though the extravagance of projects was mainly in his constituency in Sinhala South. The Chinese (Exim Bank of China) were his buddies in the white elephant ventures that provided no returns like the Hambantota International Port and Mattala Rajapaksa International Airport. These are examples of debt trap diplomacy and predatory lending by China, Sri Lanka’s largest creditor.
Sri Lanka’s economic crisis started in 2019 following the decline in tourism due to the COVID-19 pandemic. The compounding factors were tax cuts, money creation, a policy to shift to organic farming, a fall in foreign exchange reserves, and a decline in remittances. Murphy’s Law came into play. Sri Lanka faced its first-ever sovereign default in April 2022. Economic hardships led to people’s uprising, Aragalaya, the ouster of the Rajapaksas, and the appointment of Ranil Wickremesinghe, the sole UNP Proportional Representation nominee in Parliament, as President with the support of 135 of Rajapaksa’s SLPP in a House of 225.
Sri Lanka’s total debt is USD 83 billion, 128 per cent of GDP. Local debt is USD 42 billion, which is more than the external debt of USD 41.5 billion. The economy has declined by 7 per cent and will reduce a further 3 per cent in 2023. Foreign Minister Ali Sabry said China will not join the debt restructuring plan but will support it bilaterally. In the 17-creditor official committee, China attended as an observer. The IMF package of USD 2.9 billion is expected to grow to USD 4 billion with additional support from the World Bank and the Asian Development Bank. The World Bank has approved USD 700 million as budgetary support.
India’s economic lifeline was welcomed by ministers and, more importantly, Sri Lankans. The disbursed USD 4.5 billion includes LOCs on fuel for USD 500 million and food and medicine worth USD 1 billion. India was the first country to reassure the IMF in debt restructuring. It used its G20 presidency, QUAD partners, and the Paris Club to lobby for Sri Lanka’s case. It has provided 12 years for loan repayment and extended the LOC of USD 1 billion for one more year. International and Sri Lankan economists, including Ahilan Kadrigamar, have called the IMF relief package with tough conditionalities a prescription worse than the malady. In September 2022, a UN report said, “The economic crisis is a result of officials’ impunity for human rights abuses and economic crimes.” According to WA Wijeyawardena, the former Deputy Governor of the Central Bank of Sri Lanka, the economic crisis was brewing up in 2015 after warnings by the Institute of Policy Studies, Sri Lanka, but the coalition government could not act to try and counter it.” People are calling for action against those who brought about the economic collapse and distress.
Wickeremesinghe’s visit to New Delhi one year after he replaced President Gotabhaya Rajapaksa was designed to stimulate Sri Lanka’s economic recovery, though it will take a long time to repair. The joint document was titled “Promoting Connectivity: Catalyzing Prosperity.” Besides the land bridge, connectivity is set to increase in all dimensions of movement. In addition, talks have begun on the modalities of laying a petroleum pipeline to Trincomalee, the new energy hub for the region. A new framework, the Trincomalee Oil Tank Farm Agreement, is based on the existing agreement of January 2022. The strategic importance of Trincomalee Harbour, the fourth-largest in the world, was recognized alongside the Indo-Sri Lanka Accord in the exchange of letters between President J R Jayewardene and Prime Minister Rajiv Gandhi. The understanding was that no Sri Lankan port would be given out to any foreign power for military use. The Hambantota Port, on which China has a 99-year lease, was first offered to India in 2007, but it was not taken up.
India hopes that its economic assistance package and the work-in-progress CEPA will remove some of the distrust built over time, and that it has been able to push back China, which was not directly involved in the economic rescue mission.
Ashok K. Mehta is a radio and television commentator, and a columnist on defence and security issues. He is a former Major General of Indian Army. After joining the Indian Army in 1957, he was commissioned in the 5th Gorkha Rifles infantry regiment in the same year. He had fought in all major wars India went into, except the Sino-Indian War of 1962. And he was also on a peacekeeping mission in Zaire in the year 1962 and in the Indian Peace Keeping Force, Sri Lanka (1988-90) and it was his last assignment in the Indian Army. He is also a writer of several books and a founder-member of the Defense Planning Staff in the Ministry of Defence, India.
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