Sri Lanka's Economic Crisis Explained: Who is responsible & how India is helping as China turns its back

With each passing day, Sri Lanka's Economic Crisis is getting deeper and deeper. Amidst the economic emergency, Sri Lanka has also started facing political turmoil as 26 of its Cabinet Ministers tendered their resignation on Sunday, April 3 to Sri Lankan President Gotabaya Rajapaksa after public anger against the government reached its peak. Not only this but the demand for Sri Lankan PM Mahinda Rajapaksa's resignation has been increased. However, the Sri Lankan PM has refused to resign despite the fact that his 26 cabinet ministers have resigned. Reports also suggest that the new 26 ministers will take oath in Mahinda Rajapaksa's cabinet. Although the political scenario of the Island Nation may stabilize soon, Sri Lanka's Economic Crisis has been impacting the common people on a very large scale. 

So, the question arises of how Sri Lanka reached to such an economic crisis, what the government has been planning to come out of this and who else are helping the Island Nation to come out of this crisis?

Currently, Sri Lanka is going through an economic crisis where the country's government is running low on foreign currency and as a result, Sri Lanka has been unable to pay for essential imports such as fuel, food items, and other essential goods. Due to this, Sri Lankans are facing power cuts lasting 13 hours, inflation rates crossing 17%, and a steeply devalued currency. Those who are wondering about Sri Lanka's Economic Crisis Reason can read further: 

Also Read: Pressured by continuing public protests, Sri Lankan cabinet resigns

There are multiple reasons for Sri Lanka's Economic Crisis, however, the root cause of the current scenario can be attributed to economic mismanagement by successive governments and multiple ill-advised decisions including the ban on the use of chemical fertilizers and deep tax cuts promised by Sri Lanka President Gotabaya Rajapaksha during his 2019 election campaign before the COVID wreaked havoc.

The COVID pandemic is also one of the nails which has acted as a catalyst in Sri Lanka's Economic Crisis. Due to the nationwide lockdown and suspension of the international travel ban, the COVID pandemic decimated Sri Lanka's tourism sector and ultimately crippled the economy. 

Among the many factors, Sri Lanka's Economic Crisis reason also knocks the door of China i.e. China's debt-trap has been also one of the factors for the ongoing crisis. Sri Lanka's economic crisis began almost over two years ago and during that time Sri Lanka had exhausted over 70% of its foreign reserves and now is only left with $2 billion in foreign reserves. Not only this, but Sri Lanka also has a whopping $7 billion in debt due in 2022. And that is where the main problem lies, Sri Lanka's growing debt and its over-reliance on China for money for investments into infrastructure projects. 

In the 200s, Sri Lanka emulated China's growth model i.e. the Island Nation adopted an infrastructure-centric growth model. And therefore, Sri Lanka knocked on Beijing's doors to fund its infrastructure projects in order to create jobs and establish property. As per reports, China has invested $12 billion in Sri Lanka's infrastructure projects from 2006 to 2019 and still continues to fund infrastructure projects like the Colombo Port City which is being built by a Chinese state-owned enterprise called China Communications Construction Company at the cost of $1.4 billion.

However, China's decision to fund almost bankrupt Sri Lanka is not a matter of aid. As per reports, Sri Lanka's infrastructure projects are expected to complete by 2043 meaning the Island nation will hardly get any revenue for the two decades. Even after completion, 43 percent of the land will be leased to China for 99 years as Sri Lanka has no other way to return the money.  It also means that Sri Lanka has entangled itself in the Chinese debt trap. The situation of Sri Lanka is such that it has to take funds from China and in case it is unable to return the money, it either has to lease its land or take another loan from Chinese firms to pay back. 

One of the prime examples of this is Sri Lanka losing its port of Hambantota to China. Sri Lanka lost its port of Hambantota due to Sri Lanka PM's Mahinda Rajpaksha's obsession to build a port in his home region of Hambantota in 2010. Sri Lankan's PM request to fund the port were rejected by many times as it did not have much commercial value. However, China took a keen interest and nodded to fund the project. For the construction of the port, Rajapaksa took over $1 billion in loans. However, he lost in the following elections in 2015 and the new government in an effort to avoid paying back such a huge debt decided on a debt-for-equity swap wherein the port and its surrounding 15,000 acres was leased to China for 99 years.

At a time when Sri Lanka Economic crisis has worsened, its ally China has turned its back. However, it is India, that is somewhat trying to normalise and control the falling economy of Sri Lanka. At a time when Sri Lanka is facing massive shortage of food, fuel, paper and medicine, India has emerged out to be a greater force. Apart from the supply of medicines, India has decided to aid Sri Lanka with a $1 billion credit line with India for the procurement of food among other essential items. Earlier in January this year, the Reserve Bank of India (RBI) had announced a $400 million swap to help Sri Lanka pump in some reserves. It was done in the line with an aid package that the neighbours had negotiated. 

Additionally, Sri Lanka has signed an agreement for a $500 million credit line to purchase fuel from India in February. Earlier on March 17, both nations signed a $1 billion credit line for essential items. Sri Lanka is now seeking an additional credit line of another $1 billion from New Delhi to bring in essentials as shortages in the island country continue to persist. India has already put up a total of $2.4 in assistance to Sri Lanka.