India's decision to allow Sri Lanka to repay its multi-billion dollar debt in 12 years reflects the growing economic clout of the world's largest democracy in a multipolar world, two economists have said.
Last year, India extended around $4 billion, including a $1 billion credit line to Sri Lanka to help the country overcome the economic crisis that it faced at the time.
Earlier this month, the chairman of India's Export Credit Guarantee Corporation Ltd. M Senthilnathan stated that Colombo would get ample time to make payments related to its debt from New Delhi.
"Sri Lanka's negotiations with the IMF are going on. After that, restructuring package will come, we will recover [our] money over a period of time. What we are supposed to get in 3-4 years, may get extended to 10-12 years," Senthilnathan told reporters.
In March, the International Monetary Fund (IMF) and the Sri Lankan government signed a staff-level agreement for a $3 billion financial bailout package to aid the tiny Asian country's economic recovery.
About $333 million were disbursed to the island nation as an immediate measure while the rest of the amount would be granted to it in the next 48 months.
At present, Sri Lanka's liabilities to foreign creditors stand at $7.1 with Colombo owing $3 billion to China. Besides, it needs to pay back $2.4 billion to the Paris Club and another $1.6 billion to New Delhi.
'Neighborhood First' Policy
Dr. Smruti S. Pattanaik, a research fellow at the New Delhi-based think tank, Manohar Parrikar Institute for Defence Studies and Analyses (IDSA), underlined that India's decision to extend $4 billion last year was a reflection of its oft-repeated commitment as 'first responder' in the neighborhood.
She stated that this was in line with the government's policy of 'Neighborhood First', which was a priority area in Indian foreign policy.
"India's economic rise is reflected in its ability to extend credit lines to its neighbors where the interest rate is 1% or less. Most of these credit lines are invested in improving infrastructure, connecting grids for energy transmission and capacity building," Pattanaik told Sputnik on Monday
She elaborated that it was a reflection of India's economic stakes within the region. Apart from this several High Impact Community Development projects (HICDP) which are mainly grant projects have helped India to leave a mark on its neighborhood policy.
On the other hand, Dr. N. R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy, noted that India's actions in the context of Sri Lanka showed its "good neighbor" traits.
He observed that within the neighborhood, India was playing the role of a good neighbor. Plus it was strategically important for India to play that role otherwise there could be an entry of a third country between Colombo and New Delhi.
"What India is doing with Sri Lanka, Bangladesh, Nepal, and Maldives are very welcome moves. Because in the absence of such cooperation, and trade relationships, these nations may start looking at some other countries, especially when the multilateral institutions like the WTO, and IMF have become very weak to address economic shocks," Bhanumurthy said in a conversation with Sputnik.
Countries like India and China with more forex reserves need to help their neighbors and New Delhi is playing that role, especially in Sri Lanka, the financial expert reckoned.
What Led to Sri Lanka's Sovereign Default
Sri Lankan financial experts blamed economic mismanagement as the root cause of the crisis with successive governments failing to overcome the challenges the twin challenges of - a budget shortfall and a deficit in the country's current account.
"Sri Lanka is a classic twin deficits economy. Twin deficits signal that a country's national expenditure exceeds its national income and that its production of tradable goods and services is inadequate," an Asian Development Bank report said in 2019.
However, what eventually triggered the economic crisis last year was deep tax cuts that were enacted by former President Gotabaya Rajapaksa only a couple of months before the Coronavirus pandemic struck the world.
These severe tax cuts, coupled with the COVID-19 pandemic ravaged Sri Lanka's economy as the virus badly impacted the South Asian nation's booming tourism sector.
This led to a massive decline in the arrival of foreign tourists into Sri Lanka, as nations imposed strict lockdowns with Colombo following suit citing the deadly nature of the highly infectious virus.
With tourist numbers dwindling, Sri Lanka's lucrative tourism industry which was the backbone of the country's economy crashed, leaving the island nation high and dry of foreign exchange.
Consequently, Colombo's foreign reserves shrank by as much as 70 percent in the two years of the pandemic, eventually leading up to the catastrophe of March 2022 when Sri Lanka became a defaulter.