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Context

• Prime Minister Narendra Modi in a recent public function in Chennai, held that India will continue to stand with the people of Sri Lanka and support democracy, stability and economic recovery.

Sri Lanka’s Economic Crisis

• The roots of the crisis, the worst in several decades, lie in economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit.
• The current crisis was accelerated by deep tax cuts promised by Rajapaksa during a 2019 election campaign that were enacted months before the COVID-19 pandemic, which wiped out parts of Sri Lanka’s economy.
• With the country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic, credit rating agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets.
• Sri Lanka’s debt management programme, which depended on accessing those markets, derailed and foreign exchange reserves plummeted by almost 70 per cent in two years.
• The Rajapaksa government’s decision to ban all chemical fertilisers in 2021, a move that was later reversed, also hit the country’s farm sector and triggered a drop in the critical rice crop.
• As of February, the country was left with only $2.31 billion in its reserves but faces debt repayments of around $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July.
• The IMF will initiate discussions with Sri Lankan authorities on a possible loan program in the coming days.
• In the interim, Rajapaksa has also sought help from China and India, particularly assistance on fuel from the latter. A diesel shipment under a $500 million credit line signed with India. Sri Lanka and India have signed a $1 billion credit line for importing essentials, including food and medicine, and the Rajapaksa government has sought at least another $1 billion from New Delhi.

India-Sri Lanka Relations

• India and Sri Lanka have a legacy of intellectual, cultural, religious and linguistic interaction and the relationship between the two countries are more than 2500 years old.
• Both countries share a broad understanding of major issues of international interest.
• In recent years, significant progress in the implementation of developmental assistance projects for Internally Displaced Persons (IDPs) and disadvantaged sections of the population in Sri Lanka has helped further cement the bonds of friendship.
• The nearly three-decade long armed conflict between Sri Lankan forces and the LTTE came to an end in May 2009. During the conflict, India supported the right of the Government of Sri Lanka to act against terrorist forces.
• India and Sri Lanka enjoy a vibrant and growing economic and commercial partnership, which has witnessed considerable expansion over the years. The entry into force of the India-Sri Lanka Free Trade Agreement (ISFTA) in 2000 contributed significantly to the expansion of trade between the two countries.
• Sri Lanka is one of India’s major development partners and this partnership has been an important pillar of bilateral ties between the two countries over the years.
• 11 Lines of credit (LOC) have been extended to Sri Lanka by the Export-Import Bank of India in the last 15 years.
  • Important sectors in which Projects have been executed/ are under execution, under these LOCs include railways, transport, connectivity, defence, and solar.
• Buddhism is one of the strongest pillars connecting the two nations and civilizations from the time when the Great Indian Emperor Ashoka sent his children ArhatMahinda and TheriSangamitta to spread the teachings of Lord Buddha at the request of King DevanampiyaTissa of Sri Lanka.

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