Stabilise Sri Lanka

The world, including India, must step up

In a stark statement of the depth of his country’s distress, Sri Lanka Prime Minister Ranil Wickremesinghe has said that its economy has “completely collapsed”. He informed parliament the economy was facing a “far more serious situation beyond mere shortages of fuel, gas, electricity and food”. These shortages have in any case been intensifying for months and have made day-to-day life increasingly difficult for the islanders. The situation is rapidly approaching a major humanitarian crisis. Sri Lanka suspended payment on $12 billion of foreign debt last month and needs $6 billion in the next few months just to keep going — to replenish reserves and pay for imported fuel and food. At least one of its foreign creditors has already filed a suit in the US as a response to the Sri Lankan government’s decision to suspend payments. 

Mr Wickremesinghe’s dark warning is probably necessary to prop up domestic support for what may be a painful series of negotiations with a team from the International Monetary Fund (IMF) currently in Colombo.

The government hopes for an official agreement to be signed with the IMF next month. No doubt some basic reforms, including rolling back ill-advised tax breaks, will be considered necessary by the IMF. The fact is that Sri Lanka — also in the midst of a political crisis — has waited too long to take these essential steps. The previous populist and nationalist administration had an attitude of rejection to foreign or multilateral assistance and advice. India will need to take the lead in stabilising its southern neighbour if it is not to have to deal with a humanitarian and political crisis with possible spillover effects. A team of high-level officials from New Delhi, including the finance secretary, the foreign secretary, and the chief economic advisor, have travelled to Colombo to discuss possible assistance.
 

The Indian government has already provided credit lines, currency swaps, and other assistance, which total $3 billion. Some of this assistance — guarantees after all provide confidence rather than a direct bailout — may need to be scaled up. The IMF will need to provide $3 billion or so in actual commitments, however. This agreement will not be easy since the multilateral organisation will require other major lenders to Sri Lanka to enter into various debt forgiveness and restructuring mechanisms. In the past, lenders from China have proved difficult to incorporate into such agreements. Mr Wickremesinghe has said he will convene a conference of lenders, including Japan, India, and China, possibly alongside the US. One of the priorities here must be to create a structure to deal with debt to China in crisis-hit countries. This can serve as a template for such problems in the future. Already Laos, which owes about half its public debt to China, is being identified as Asia’s next possible defaulting country.

Much action will have to be domestic, with internal structural reform that stabilises the currency and ensures that the island economy’s fundamentals, which remain sound, can lead to sustained growth. But the outside world, led by India, must assist in this process by means of helping guarantee stability through what will be a painful transition. Mr Wickremesinghe has warned the country may “hit rock bottom”. The rest of the world must prevent that from happening.