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Skipping between the frying pan and the fire

19 Dec 2021

After a few months of denials and evading the question, the Government has finally confirmed what nearly every economic critic has been warning – Sri Lanka’s foreign reserves are in the red, at around $ 1.6 billion, their lowest figure in the last 12 years. This is barely enough to cover over two weeks of imports. Put simply, the nation is feeling the pressure of a family that cannot afford next month’s rent. We’re all familiar with the laundry list of complaints over the poor decisions that have led us to this point; and the number of people we could point the finger of blame at would probably exceed the numbers of people we saw queuing up for milk powder, gas, or any one of the essential commodities that kept experiencing shortages over the past year. However, like the family trying to get the upcoming rent together, we have to keep our eyes on the prize – do we have some way to sort things out in the short term? With over $ 7 billion in debt due for repayment over the next year, the country is scrambling to tighten its belt and save up on every dollar – while conspicuously shunning the support of the International Monetary Fund – through the Central Bank’s new roadmap, which is centred on attracting foreign exchange inflows. But how, one might ask, are we to implement a new playstyle so late in the game? The answer, by the looks of things, is that we just aren’t. No, in the face of an outcome that has haunted the dreams of many an economist, Sri Lanka seems to be relapsing into its age-old strategy: borrow from Peter to pay Paul. While China – allegations of debt-trap diplomacy notwithstanding – has proven quite a notable benefactor to Sri Lanka in the recent past, there have been some hiccups in the relationship that are proving costly. The largest of these hiccups would definitely be how Sri Lanka dealt with the issues that arose with a consignment of Chinese fertiliser that initially tested as contaminated, but was later proven to be usable; an issue that has evolved into an arbitration case that could possibly result in Sri Lanka repaying the Chinese firm a decent sum in compensation. Even though this sum could be chalked up to operational losses, this is a serious loss of advantage when it comes to making negotiations. Another hiccup adding to this is the fate of a deal to implement hybrid power generation systems on three islands off Jaffna, which was initially to be carried out with a Chinese company under Asian Development Bank funding, but was later put on hold due to a subsequent grant from India. In fact, this snub seemed to have struck enough of a nerve for the Chinese Embassy to share an almost taunting post online that described how the projects had been held off due to a “security concern”, and that therefore the company in question would instead be devoting its resources to similar projects in the Maldives. Oddly enough, this “security concern” is reported to have been from none other than India, who proved willing enough to open up a line of grant funding to seal off the project from Chinese interests. This is especially interesting because India, along with Japan, was previously snubbed by Sri Lanka on a trilateral agreement to develop the East Container Terminal of the Colombo Port. Thus, the turn of events made it appear that India, rather than simply looking towards economic benefits, is far more vested in keeping Chinese interests as far away as possible from its southern periphery; or at the very least, looking to teach its regional contender a little bit about the principle of karma. And yet, this wasn’t the end of the drama playing out. After Finance Minister Basil Rajapaksa’s visit to our big brother across the pond, Indian media came alive with reports that India was planning a massive bailout package for Sri Lanka’s ailing economy, with a series of planned credit lines for food, medicine, fuel, and other essential imports. Subsequently, the Chinese Ambassador to Sri Lanka commenced a tour of the Northern Province – proving, at the very least, that some parties understand the value of securing brand loyalty. Setting aside the question of whether India’s assistance will prove to be a vital lifeline, a mere booster-shot, or even the spark to a bidding war between two superpowers at this point, we might want to look at things from a somewhat local perspective as opposed to the geopolitical lens. Even amidst the pandemic-related economic crisis, do we – a nation that has seen a considerably higher per-capita income compared to its regional peers, which enjoys a coveted strategic location and is rich in natural resources – want to play the trophy wife (or favoured side-piece, to be blunt) in this scenario?  To be fair, at this juncture, we might not have much of a choice. When the rent is due, desperate tenants will do whatever they can to ensure a roof over their heads for another month. But what’s important to remember is that thanks to the blessing of Sri Lanka’s strategic location, any economic hallelujah comes with its own set of terms and conditions. It’s up to us to read the fine print.


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