India offered a $1 billion credit line to Sri Lanka due to the rising economic crisis.
Furthermore, in mid-2021, Sri Lanka also received $200 million as aid from Bangladesh.
The introduction of organic farming, economic mismanagement, and many factors conclude the Sri Lankan crisis.
A series of bomb blasts in April 2019 severely crippled Sri Lankan tourism.
The Sri Lankan crisis
With scarce foreign exchange shrinking to one month’s export cover, India offered Sri Lanka a $1 billion credit line.
Earlier this year, Fitch downgraded Sri Lanka’s credit rating to CC.
In 2021, the current account deficit was 3.8% of GDP.
While the decade-long violence caused economic instability, recent events such as a switch to organic farming, Chinese debt, corruption, and the pandemic contributed to the Sri Lankan crisis.
Additionally, the bomb blasts of April 2019 left 277 dead, along with eight suicide bombers.
The attack on Sri Lanka crippled its tourism, which accounted for 10-12% of GDP.
Moreover, as the country struggled to recover, the reduction in VAT added to falls in revenue.
However, in 2021, Sri Lanka somewhat recovered, but tourism failed to recover, and inflation soared.
Furthermore, the introduction of organic farming while banning chemical fertilizers led to imports, increasing the external payment crisis.
India must step up for Sri Lanka
In 2010, the Chinese made a deal with the then Rajapaksa government to develop a port on Sri Lanka’s southern coast, Hambantota.
However, the port completion took seven years, and China ended up owning 70% of the port.
The 70% Chinese ownership came about as the total cargo volumes did not suffice the capital invested.
Nevertheless, India refuses to let China take over expanding parts of the Sri Lankan territory.
India already offered a $1 billion credit line to Sri Lanka as aid.
In addition to the credit line, India must also provide Sri Lanka with policy advice and investment from Indian entrepreneurs and build a supply chain between the two economies by exporting tea and information technology services.
Additionally, India can benefit greatly by supporting Sri Lanka in the long run.
What does the Sri Lankan crisis teach us?
Sri Lankan Tamils account for 15% of the population.
Therefore, oppression from a fiendish majority could lead to lost opportunities for economic growth.
The lost opportunities via civil unrest, loss of internal cohesion, and dependence on a single external benefactor lead to a debt trap.
However, Sri Lanka can avoid a debt trap by increasing domestic tax revenue and reducing government expenditure.
With Sri Lanka as a tourist hot spot, the $1 billion aid from aid could help the country get back on its feet.
India is obligated to look out for the country as a friendly neighbor.