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India must lead Quad effort to pull out Sri Lanka from clutches of China’s Debt Trap Diplomacy

Source : News18

India must lead Quad effort to pull out Sri Lanka from clutches of China’s Debt Trap Diplomacy
Anti-government demonstrators hold placards as they shout slogans during a protest demanding the arrest of former Prime Minister Mahinda Rajapaksa, in Colombo, Sri Lanka, May 17, 2022. (Photo: Reuters/Adnan Abidi)



The statement issued by Sri Lanka’s newly appointed Prime Minister Ranil Wickremesinghe was nothing short of an intimation, nay confirmation, of the apocalyptic economic crisis that the island nation confronts. The numbers thrown by Mr Wickremesinghe are self-explanatory of the mess that he will need to clean up to put Sri Lanka back on track. Government revenues cover only 40 per cent of the expenditure being incurred. The fiscal deficit is around 13 per cent of GDP.

The foreign exchange reserves are virtually non-existent. According to Wickremesinghe, “It is a challenge for the treasury to find USD 1 million.” Petrol stocks are down to just one day. Sri Lanka is looking at power cuts of around 15 hours a day because a quarter of the electricity is produced from oil which the government has no money to buy. There are huge shortages of medicines. Shortages of virtually every other commodity, including food, are inescapable. With the government being “compelled to print money” to pay salaries, there is a danger of hyper-inflation. Government finances will get more squeezed because of massive rise in interest rates.

The economic meltdown has had a huge political impact with Wickremesinghe’s predecessor Mahinda Rajapaksa literally having to be flown out in a chopper lest he be lynched by an incensed mob protesting on the streets. The politics of the country is sharply divided, even polarised, and there is little sign of politicians putting aside their deep differences and coming together to pull the country out of the existential crisis it faces. Quite to the contrary, and in a somewhat cynical way quite understandably, the opposition smells a golden opportunity to not only take advantage of the situation but also settle scores with the Rajapaksa clan and its political allies. The game of thrones will however only worsen the crisis in the country and prevent both meaningful reform and hard decisions.

Clearly, assuming that Wickremesinghe survives in office to do what he has promised, the task before him is Herculean. He doesn’t have a whole lot of political capital backing him to make the sweeping changes and inflict the horrible pain that is concomitant of any meaningful structural adjustment programme. As a single member from his party in Parliament, Wickremesinghe will have to depend on the support of his political rivals on both the left and the right to put things together, which is easier said than done especially given the extremely unpopular and harsh economic measures that will have to be taken to revive the economy. Although Wickremesinghe is an experienced politician, and is on a good wicket with many of the countries that Sri Lanka is looking at for assistance, his record in office has been rather patchy. In other words, while he has the experience, Sri Lanka’s experience with him has not exactly been stellar. But he has nothing to lose really. If he can pull Sri Lanka out of the crisis, he will have cemented his legacy and his place in the history of his country; if he fails, falters or even falls, he won’t be much worse for it because no one really expected much from him anyway.

Be that as it may, in his statement, Wickremesinghe gave an idea of the sort of adjustments that will have to be made. According to him, the government is currently giving a subsidy of around Sri Lankan Rupee (SLR) 30 per unit of electricity. Every litre of petrol is subsidised to the tune of SLR 80, diesel SLR 130 and kerosene SLR 295! That Sri Lanka simply cannot afford these subsidies is a no-brainer, especially given that it is broke. But making people pay economic prices of essential utilities runs the risk of massive, even uncontrollable public outrage spilling on to the streets. Add to this the challenge of dismantling the entrenched interests, including breaking some of the inefficient and corruption-ridden state-controlled monopolies like the Ceylon Petroleum Corporation and the Ceylon Electricity Board. The bottom-line is that Sri Lankan economy is likely to contract and many of the things that people were used to receiving from the state will become a thing of the past. Living standards are going to come crashing down, which will have its own political and social repercussions.

India is, of course, watching the unfolding scenario in Sri Lanka with a lot of concern. The last thing India wants is to see a friendly neighbour like Sri Lanka get severely destabilised. There are both critical security and political concerns attached to what happens next. Not surprisingly, India has stepped up to the plate and already committed around $3.5 billion to assist Sri Lanka get over the immediate crisis. Perhaps India will do more, but she has her own constraints and limitations. Even so, India can use her equities with other important players in the Indo-Pacific to help Sri Lanka. In a sense what is happening in Sri Lanka can be converted into an opportunity, even a test case, for the Quad countries to rescue countries from the clutches of China’s debt trap diplomacy. Ending China’s baleful influence on strategically important country like Sri Lanka, which straddles the sea lanes in the Indian Ocean region, should be on the agenda of the Quad summit meeting in Japan.

While the scale of Sri Lanka’s problems is huge for the island, helping it out isn’t such a big deal if the Quad countries along with the EU work together. India needs to take a lead on Sri Lanka in working out a rescue package with its partners. But even as India will do what she can, it is just as important that Sri Lanka doesn’t use any assistance coming its way as another freebie and ducks the necessary reforms it needs to undertake to put the nation back on a sustainable path. This basically means that the Lankans will have to reconcile to the fact that the free lunches have ended, and that no one else will pay their bills for them. By all accounts it appears that Sri Lanka will have to go the IMF route and start implementing the rather onerous conditionalities that will come with the IMF programme. Where India and her partners can help is in smoothening, even softening, the transition process. But the heavy lifting will still have to be done by the Lankans.

There are no soft options left for Sri Lanka, certainly not after the country has defaulted on its debt and payments obligations. Any delay in doing what it must do will only worsen the crisis, and might even rob Sri Lanka of whatever external support was going to come its way. Simply put, the good times are over and life is unlikely to be the same, not for the foreseeable future. The sooner the people and politicians of Sri Lanka realise this and adjust to this reality, the faster the country will get back on the rails.

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