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Sri Lankan MPs moot ‘orderly renegotiation’ of foreign debt

Contact Counsellor

Sri Lankan MPs moot ‘orderly renegotiation’ of foreign debt

  • A group of senior parliamentarians in Sri Lanka have called for an “orderly negotiated postponement” of outstanding foreign debt and corrective policy measures including a “strong social welfare scheme”, to combat the island nation’s economic crisis.
  • The import-reliant country is facing a severe dollar crunch for months, fanning fears of a sovereign default and a severe food shortage for citizens.
  • They have also underscored the need for urgent and “strong social welfare” measures so that the poor and vulnerable communities are protected from the adverse impact of the economic crisis.

Economic condition of Sri Lanka

  • Sri Lanka which is an import-reliant country is facing a severe dollar crunch for months, fanning fears of a sovereign default and a severe food shortage for citizens.
  • Its gross foreign reserves dropped to $ 2.3 billion in January 2022, down by 24 % since December.
  • It has debt totalling nearly $ 7 billion this year.
  • Its inflation increased to 14.2% in January, while the year-on-year (YoY) food inflation went up to 25%, from 22.1% in December.

External Assistance sought by Sri Lanka

  • Sri Lanka has sought Indian assistance of over $ 2 billion and New Delhi has cleared $ 1.4 billion
  • It is also tapping other sources including China, for further assistance and a debt restructure.
  • The government is divided on seeking support from the International Monetary Fund (IMF),

India’s assistance to Sri Lanka

  • 11 Line of credits(LoCs) has been extended to Sri Lanka by EXIM bank in the last 15 years.
  • The Sectors covered under it are Railway, transport, connectivity, defence and solar
  • Important Projects completed through LOCs are Supply of defence equipments; Upgradation of railway line from Colombo to Matara; track laying by IRCON on Omanthai-Pallai sector, Madhu Church Talaimannar, Medawachchiya-Madhu Railway line; Reconstruction of Pallai-Kankesanthurai Railway line; Signalling and telecommunication system; Supply of engine kits for buses, diesel locomotives railways, DMUs, Carrier and fuel tank wagons etc.
  • Solar Projects: US$ 100 million LoC signed b/w Govt. of Sri Lanka and EXIM Bank on June 16, 2021
  • It will provide Rooftop solar units for (Govt buildings, low income families) and Floating solar power plants.

Implications of Sri Lanka’s economic crunch for India

  • Sri Lanka’s economic crisis may further push it to align its policies with Beijing’s interests.
  • In past Sri Lanka backed out from a tripartite partnership with India and Japan for its East Container Terminal Project at the Colombo Port under Chinese pressure
  • China can further take advantage from debt issue of Sri Lanka to hurt India’s interest in the country

Way Forward

  • Sri Lanka should immediately initiate a multistep process towards an orderly negotiated postponement and restructure the repayment of its sovereign debts. It can then correct its policies towards a path of sustainable economic growth and debt management, while also ensuring access to essential needs and goods for the Sri Lankan people and its economy.

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