[Answered] What are the key challenges faced by Sri Lanka in resolving its economic crisis? How is it an opportunity for India to revitalize India-Sri Lanka Relations? 

Introduction: Write a brief introduction on economic crisis in Sri Lanka.

Body: Write a few challenges Sr Lanka is facing in resolving its economic crisis. Further write few points on how is it an opportunity for India, to strengthen its relations with Sri Lanka.

Conclusion: Write a brief conclusion.

Recently, Sri Lanka has caught in a severe economic crisis. A severe shortage of foreign currency has left Rajapaksa’s government unable to pay for essential imports, including fuel, leading to debilitating power cuts lasting up to 13 hours. Sri Lanka has steeply devalued its currency in its preparation for IMF’s loan programme, leading to soaring inflation.

Challenges faced by Sri Lanka in resolving its economic crisis:

  • Twin deficit: Sri Lanka is facing a budget shortfall alongside a current account deficit. The country’s national expenditure exceeds its national income. Capital-intensive projects (e.g., Hambantota port) did not deliver the expected returns. BOP crisis led to the devaluation of Sri Lankan currency hitting payments for essential items and debt servicing.
  • Decline in foreign exchange reserve: It gave rise to high uncertainty among people regarding the nation’s economic stability in the coming time.
  • Difficulty in getting international credit: Many rating agencies downgraded Sri Lanka’s sovereign ratings to the junk category citing rising repayment pressures and “uneven access” to financing as reasons.
  • Spiraling debt: Sri Lanka has borrowed repeatedly since 2007 leading to $11.8 billion worth of piled-up debt which makes up 36.4% of its external debt.
  • Decline of Tourism Industry: due to Easter bombings in 2019 and the Covid pandemic.

Opportunity for India

Lately, the relations of Sri Lanka with China have been improving drastically, on the cost of its relations with India.

The crisis has resulted in the strengthening of economic relations between the two countries. Recently, India extended a line of credit of 1 billion dollars to help in maintaining their food prices and fuel costs, also signed a $400-million credit swap facility with Sri Lanka. In the last 50 days, India has sent 200,000 MT of diesel to the country.

On the other hand, China announced it was suspending its own plan to build power plants on three Sri Lankan islands due to security concerns.

The crisis has allowed India to strengthen its geopolitical interests by increasing its presence in strategically placed Sri Lanka.

As both countries have a democratic setup there is scope for broadening and deepening the ties. India and Sri Lanka are also maritime neighbors. Any instability in Sri Lanka will have a spillover effect on India. Mutual recognition of each other’s concerns and interests can improve the relationship between both countries.

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