Sri Lanka has been grappling with a massive debt crisis. The country has foreign debts amounting to about USD 46 billion, of which the largest portion is owed to Chinese lenders. Japan, India, and commercial bondholders are also among the major creditors. A failure to strike a deal with commercial bondholders could hamper Sri Lanka’s economic recovery efforts.
In a historical development, Sri Lanka in May 2022 became the first country in the Asia-Pacific region to default on its debts in two decades. The default was primarily caused by internal economic mismanagement, global inflation surge post the coronavirus pandemic, and Russia’s invasion of Ukraine.
The default led to a sharp drop in foreign currency reserves, resulting in an acute shortage of imported food, fuel, and medicine. This had a catastrophic impact on the living standards in Sri Lanka, triggering widespread protests throughout the year.
Understanding the Paris Club
The Paris Club is a group of major western creditor countries that originated from a meeting in 1956, where Argentina agreed to meet its public creditors in Paris. It operates as a forum for official creditors to find feasible solutions to payment difficulties faced by debtor countries.
Currently, the Paris Club consists of 22 members including nations like Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Japan, Netherlands, Norway, Russia, South Korea, Spain, Sweden, Switzerland, the United Kingdom, and the United States. All members of the Paris Club are part of the Organisation for Economic Co-operation and Development (OECD).
Since 1956, the Paris Club has reached 478 agreements with 102 different debtor countries, treating debts amounting to USD 614 billion. However, the significance of the Paris Club has diminished over the past couple of decades with China emerging as the world’s biggest bilateral lender.
India’s Role in Aiding Sri Lanka’s Debt Management and Economic Development
India has played a key role in helping Sri Lanka navigate its debt crisis. It was the first to express support for financing and debt restructuring in Sri Lanka, thus facilitating collaboration with the International Monetary Fund (IMF) and other creditors.
In addition to financial aid, India and Sri Lanka have prioritized comprehensive connectivity, including people-to-people connections, and renewable energy. Indian companies are spearheading renewable energy projects in the northeastern part of Sri Lanka, indicating a growing collaboration in the energy sector.
Both countries are currently exploring the possibility of an Economic and Technology Cooperation Agreement (ETCA) to integrate their economies and foster development. Apart from that, they have consented to establish a multi-product petroleum pipeline from the southern part of India to Sri Lanka, ensuring an affordable and reliable supply of energy resources.
Sri Lanka has also adopted India’s Unified Payments Interface (UPI) service, marking a significant step towards improving fintech connectivity between the two nations.
Sri Lanka’s Debt Restructuring and the Role of IMF
Recently, Sri Lanka arrived at a preliminary debt restructuring deal with India and the Paris Club Group. This comes as a huge relief for the nation as it opens the way for resuming the stalled IMF loan program, worth USD 3 billion.
When a country defaults on its debts, it signifies that the government is incapable of meeting its financial obligations to its creditors. Such a failure can manifest in various ways and has significant implications. In Sri Lanka’s case, defaulting on its debts in 2022 could help secure the next tranche of the IMF lending package agreed in March 2023.
India, along with the rest of the world, is watching the unfolding economic saga in Sri Lanka, hoping for a swift recovery for its long-time ally.
