Sri Lanka’s Manmade Economic Disaster And What It Means For India

With inflation at an all-time high, food prices skyrocketing and the country drowning in debt, Sri Lanka is seemingly on the verge of bankruptcy. This, coupled with the challenges brought forth by the pandemic, has brought the island nation’s economy to its knees.

According to a World Bank report, over 5 lakh Sri Lankans have fallen below the poverty line as a result of the pandemic. The rapidly sinking currency in conjunction with soaring inflation fueled food shortages. Depleted forex reserves further prevented imports. As a consequence, on August 31, 2021, an economic emergency was imposed in the country by the Rajapaksa government under the Public Security Ordinance. Officials, thus, scrambled to seize food stocks held by traders and arrest hoarders in an effort to curb soaring food prices.

Sri Lanka’s foreign reserves fell from $7.5 billion in November 2019 to $2.1 billion at the end of July, 2020. The worsening trade deficit was dealt a severe blow by crashing tourism, a primary source of revenue for the country. This, in addition to the immense foreign debt, has pushed the country to the verge of bankruptcy. “We have high debt from three countries — China, Japan and India. The total outstanding for this year would be USD 6.9 billion,” said Finance Minister Basil Rajapaksa.

Attributing this catastrophic cascade of events to the pandemic or China’s debt trap policy in Sri Lanka would not paint an accurate picture. Although these factors did play a key role in its economic downfall, at the root of this issue lies the Rajapaksa government’s overnight decision on April 29 to ban the import of chemical fertilizers.

This was done in an effort to make Sri Lanka the world’s first country to practice organic-only agriculture. With many crops heavily dependent on the use of chemical fertilizers, this struck a heavy blow to the nation’s economy. “The ban has drawn the tea industry into complete disarray…if we go completely organic, we will lose 50% of the crop”, said Herman Gunaratne, head of tea conglomerate Herman Teas.

Ever since the Rajapaksa administration came into power, Sri Lanka has shown an increasing proclivity to China. Now crushed by crippling Chinese debt, India should use this opportunity to mend relations with our neighbour. By pumping infrastructure investments into the country and employing debt trap tactics, China may be privy to access of strategic Sri Lankan ports, which may prove to be a security threat to India. Thus, providing aid to the struggling nation may serve to increase India’s much needed sphere of influence.