Four-pronged plan on Sri Lanka crisis

Context:

India and Sri Lanka agreed to a four-pronged approach to discuss initiatives on food and energy security to help mitigate Sri Lanka’s economic crisis, during a two-day visit by Sri Lankan Finance Minister Basil Rajapaksa to New Delhi.

Relevance:

GS-II: International Relations (India and its Neighborhood, Foreign Policies affecting India’s Interests)

Dimensions of the Article:

1. About the Economic Crisis in Sri Lanka
2. About the Four-pillar initiative
3. India – Sri Lanka and debt

About the Economic Crisis in Sri Lanka

• Government of Sri Lanka declared an economic emergency in last week of August 2021 because of rising food prices, depreciating currency, and depleting forex reserves.
• Factors that led to the current economic crisis in Sri Lanka include:
  1. Tourism industry in Sri Lanka has hit hard because of covid-19 pandemic. It represents more than 10% of the its Gross Domestic Product and brings in huge foreign exchange.
  2. Thus, forex reserves have decreased to$2.8 billion in July 2021 from over $7.5 billion in 2019.
  3. As the foreign exchange supply is decreasing, amount of money that Sri Lankans was having to shell out to purchase the foreign exchange has increased. This, value of Sri Lankan rupee has depreciated by 8%.
  4. As Sri Lanka depends on imports to meet the basic food supplies, the price of food items there has increased in line with depreciating rupee.
• Sri Lankan government blamed speculators for resulting into rise in food prices by hoarding essential supplies. Government declared “economic emergency” under the Public Security Ordinance.
• Under the emergency situation, army has been tasked to seize the food supplies from traders and supply them to consumers at fair prices.
• Government has also given power to the army to ensure that forex reserves are used to purchase the essential goods only.

About the Four-pillar initiative

1. Lines of credit for food, medicines and fuel purchases granted by India. Lines of credit is a credit facility extended by a bank or any other financial institution to a government, business or an individual customer, that enables the customer to draw the maximum loan amount.
2. A currency swap agreement to deal with Sri Lanka’s balance of payment issues. The word swap means exchange. A currency swap between the two countries is an agreement or contract to exchange currencies with predetermined terms and conditions.
3. An early modernization project of the Trinco oil farms that India has been pursuing for several years. The Trincomalee Harbour, one of the deepest natural harbours in the world, was developed by the British during World War II. In particular, the projects to develop oil infrastructure in Trincomalee have been hanging fire since 2017.
4. A Sri Lankan commitment to facilitate Indian investments in various sectors.

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-Source: The Hindu