Sri Lanka’s President Anura Kumara Dissanayake is in India for his first foreign visit after winning the presidentship in elections which were held in September 2024. Dissanayake’s election victory had surprised a lot of observers as his party, the National People’s Power (NPP), had just 3% of the vote share in the elections which were held in 2019. To be sure, the NPP’s victory in the parliamentary elections which were held in November 2024 have cemented his hold on political
Understanding the crucial ties between India, Sri LankaThe Sri Lankan economy is yet to regain its pre-pandemic GDP levels
In current dollar terms, Sri Lanka’s GDP reached a peak of $94.5 billion in 2018. This number fell to $74.6 billion by 2022 according to data in the World Economic Outlook (WEO) database of IMF. The 2023 Annual Report by the fiinance ministry of the government of Sri Lanka (https://tinyurl.com/7m79vcxv) which gives statistics as on April 30, 2024, said that the 2022 GDP of Sri Lanka was $76.8 billion, which was expected to increase to 84.4 billion in 2023. The key takeaway from these numbers is that Sri Lankan GDP is at a significantly lower level than where it was before it faced a double whammy of first the pandemic and then the macroeconomic crisis. To give a comparative picture, global GDP has increased from $86.5 trillion in 2018 to $105.7 trillion in 2023.
The economic meltdown made government finances extremely precarious in Sri Lanka
The numbers speak for themselves. According to a March 2023 IMF statement (https://tinyurl.com/57at8bsf) announcing a bailout package of $3 billion to Sri Lanka, the country’s gross official reserves fell from $7.6 billion to $1.9 billion between 2019 and 2022. In terms of prospective imports of goods and services, this amounted to a fall from a cover of five months in 2019 to just a month in 2022. The general government gross debt as a share of GDP increased from just 72% in 2017 to 115.9% in 2022, the highest this number has ever been since 1990, the earliest period for which this data is available in the IMF database.
16% of Sri Lanka’s total government debt and 56% of its bilateral debt is from China and India
According to the quarterly debt bulletin (https://tinyurl.com/4zx85sca) of the Sri Lanka’s ministry of finance, the total outstanding debt of central government of Sri Lanka as of September 2024 was $38.3 billion. Of this, $12.5 billion was owed to multilateral lenders such as the Asian Development Bank, World Bank and IMF. Of the $11 billion in bilateral debt, $4.4 billion was owed to the Paris Club countries – a group of 22 developed countries which makes borrowings together – and another $6.6 billion to other countries. China and India had outstanding loans worth $4.9 billion and $1.4 billion respectively to Sri Lanka. This makes China and India the largest and third largest bilateral lender to Sri Lanka. Japan with $2.5 billion in outstanding loans is the second largest lender.
Sri Lanka’s debt problems with China might be deepening its strategic alliance with India
“Sri Lanka has made substantive progress towards advancing debt restructuring to restore debt sustainability. A swift finalisation of the Memorandum of Understanding with the Official Creditor Committee and final agreements with the Export Import Bank of China remain a priority”, IMF officials said in a June 14, 2024 press briefing (https://tinyurl.com/ycy5ba5s) after finishing Article IV consultations with Sri Lanka. Sri Lanka had outstanding debt of $4.2 billion to the Export Import Bank of China alone as of September 2024. The joint statement issued after a meeting between Prime Minister Modi and Sri Lanka’s President Dissanayake on Monday acknowledges “India’s crucial assistance in Sri Lanka’s debt restructuring process, including as co-chair of the Official Creditors’ Committee (OCC), as being instrumental in finalising the debt restructuring discussions in a timely manner”. It is important to note that 39 loans from the EXIM Bank of China were restructured with effect from January 1, 2024 according to the Sri Lankan government details of outstanding debt quoted above. Whether these emerging areas of cooperation will lead to Sri Lanka making a complete pivot from China towards India in the strategically important Indian Ocean region remains to be seen.
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