World Bank readies Sri Lanka aid package, IMF calls loan talks 'fruitful'
The International Monetary Fund said on Saturday it held "fruitful technical discussions" with Sri Lanka on its loan request, while the World Bank said it was preparing an emergency aid package for the crisis-stricken country
COLOMBO: Sri Lanka is ranked fifth among the 10 countries with the highest food price inflation in the world, according to the latest World Bank assessment. In its Food Security update, the World Bank said trade policy actions on food and fertilizers have surged since the beginning of the war in Ukraine. Countries actively used […]
MAY 19: While popular perception indicated China had outpaced India, the recent economic and political turmoil in Sri Lanka seems to have given India's foreign policy a fresh lease of life in the island nation.
Sri Lanka is in the middle of its worst economic crisis since independence from Britain in 1948. The country has been rocked by protests as people seethe with anger over soaring prices and shortages of food and fuel.
Last week, Mahinda Rajapaksa resigned as prime minister after his supporters clashed with peaceful protesters, sparking a deadly night of violence on 9 May.
Ranil Wickremesinghe, who took over as PM, said the country's economic problems would get worse before getting better.
He appealed for outside financial help, including from India.
India has never been a major lender to Sri Lanka, unlike China which by the end of 2019 owned a little over 10% of Sri Lanka's outstanding foreign debt stock.
In early 2021, with the economic crisis looming, the Sri Lankan government had also obtained a 10bn yuan ($148m; £119m) currency swap facility from China to tackle its foreign exchange shortage.
But now, India is slowly emerging as one of the biggest providers of aid to Sri Lanka.
Colombo has racked up $51bn (£39bn) in foreign debt. This year, it will be required to pay $7bn (£5.4bn) to service these debts, with similar amounts for years to come.
The country is also seeking emergency loans of $3bn to pay for essential imports such as fuel.
While the World Bank has agreed to lend it $600m, India has committed $1.9bn and may lend an additional $1.5bn for imports.
Delhi has also sent 65,000 tonnes of fertiliser and 400,000 tonnes of fuel, with more fuel shipments expected later in May. It has committed to sending more medical supplies too.
In return, India has clinched an agreement which allows the Indian Oil Corporation access to the British-built Trincomalee oil tank farm.
India also aims to develop a 100MW power plant near Trincomalee.
Mixed feelings over Indian help
Many in Sri Lanka feel that India's growing presence in Colombo could mean a "dilution of sovereignty".
"For the past year and a half, there has been a crisis in Sri Lanka and we believe India has used this to serve its own interests. Yes, they gave some credit, some medicines and food but [they are] not being a friend. There is a hidden political agenda," said Pabuda Jayagoda of the Frontline Socialist Party.
But others are more accepting of Indian help.
"Let's not blame India for our woes," says V Ratnasingham, an onion importer in Colombo. "We are still getting onions from India at a decent price and they are giving us credit in times of crisis. It's the Sri Lankan government's failure that onion prices have trebled."
The suspicion over India's intentions right now comes against the backdrop of Sri Lanka's ties to China.
After Mahinda Rajapaksa took charge as president in 2005, Sri Lanka's drift towards China was believed to be a preference for a "more reliable partner enabling domestic economic development".
More and more infrastructure projects - including the multi-billion dollar Hambantota port and the Colombo-Galle expressway - were awarded to China.
Chinese President Xi Jinping's maiden visit to Colombo in 2014 was also a clear diplomatic signal to Delhi.
Hambantota is nowadays commonly referred to as a "white elephant" which bled Sri Lanka's economy. So are several other expensive projects which led Sri Lanka into a huge Chinese debt-cycle.
Many anti-government protesters at Colombo's Galle Face Green are convinced that this push to modernise fast led Sri Lanka to its current situation.
The country owes China $6.5bn and talks are being held on restructuring the debt.
While China had earlier agreed to bolster Sri Lanka's foreign currency reserves by swapping the rupee for the yuan, it has since signalled displeasure over Colombo approaching the International Monetary Fund (IMF) for help.
Noora Noor, 44, has been camping at Galle Face along with her family, demanding President Gotabaya Rajapaksa, the younger brother of Mahinda, resign.
"All Chinese money that came in was never accounted for, right? Why else would my country have defaulted on payments? Now all supplies are coming from India, so my question is who should we trust - China or India?" she asks.
Still, there are some optimists who feel diplomacy will help.
"Is Sri Lanka being placed on a collision course with China? If so, we need to avoid such an eventuality due to other negative situations that may arise. Balancing relationships is a must," Austin Fernando, Sri Lanka's former high commissioner to India, wrote in The Island newspaper.
India's efforts
India has tried hard to match up to the growing Chinese clout in what it sees as its neighbourhood.
After President Xi's visit in 2014, Indian Prime Minister Narendra Modi not only visited Colombo the next year but also claimed to be "the best of friends" while addressing the Sri Lankan parliament.
Arjuna Ranatunga, a former Sri Lankan cricketer who went on to become a cabinet minister, recalls India being generous when he was in office.
"I was handling both the petroleum and port ministries in 2015 and we were struggling to construct the Jaffna airport for a lack of funds. I went to Delhi seeking help. PM Modi's government offered a subsidised loan and later converted it into a grant. What else do you want from a neighbour?"
The return of the Rajapaksas to power in 2019, this time with Gotabaya president and Mahinda prime minister, also made India realign its foreign policy options and new agreements over oil and food commodities were signed hastily.
State visits followed between Colombo and Delhi without eliciting much response from China.
The question of Sri Lanka's Tamil minorities and their demand for rights has been at the forefront of the diplomatic negotiations with India.
After the civil war ended in 2009, India extended support to the Sri Lankan government.
Sri Lanka is, however, yet to implement the 1987 India-Sri Lanka Peace Accord which promised to devolve powers to all provinces, including where the Tamils were in a majority.
The current economic crisis, however, has certainly leapfrogged over any other political concerns between the two nations.
There has been a shift in public perception in Sri Lanka - which was seen as anti-India and pro-China - thanks to consistent supplies from India of essential commodities.
"India did lose out to China about 15 years ago but is trying hard to make a decent comeback," says Bhavani Fonseka, a senior researcher at the Centre for Policy Alternatives in Colombo.
"Ethnic minorities in Sri Lanka have always looked up to India to champion their demands for equal rights, whereas the Sinhalese majority still has a mixed perception," she says. "Some also worry over India's interference in internal matters. But I feel the last few weeks have changed this completely."
With inputs from BBC
MAY 19: The world faces a "human catastrophe" from a food crisis arising from Russia's invasion of Ukraine, World Bank president David Malpass has said.
He told the BBC that record rises in food prices would push hundreds of millions people into poverty and lower nutrition, if the crisis continues.
The World Bank calculates there could be a "huge" 37% jump in food prices.
This would hit the poor hardest, who will "eat less and have less money for anything else such as schooling".
In an interview with BBC economics editor Faisal Islam, Mr Malpass, who leads the institution charged with global alleviation of poverty, said the impact on the poor made it "an unfair kind of crisis... that was true also of Covid".
"It's a human catastrophe, meaning nutrition goes down. But then it also becomes a political challenge for governments who can't do anything about it, they didn't cause it and they see the prices going up," he said on the sidelines of the IMF-World Bank meetings in Washington.
The price rises are broad and deep, he said: "It's affecting food of all different kinds oils, grains, and then it gets into other crops, corn crops, because they go up when wheat goes up".
There was enough food in the world to feed everybody, he said, and global stockpiles are large by historical standards, but there will have to be a sharing or sales process to get the food to where it is needed.
Mr Malpass also discouraged countries from subsidising production or capping prices.
Instead, he said, the focus needed to be on increasing supplies across the world of fertilisers and food, alongside targeted assistance for the very poorest people.
The World Bank chief also warned of a knock on "crisis within a crisis" arising from the inability of developing countries to service their large pandemic debts, amid rising food and energy prices.
"This is a very real prospect. It's happening for some countries, we don't know how far it'll go. As many as 60% of the poorest countries right now are either in debt distress or at high risk of being in debt distress," he said.
"We have to be worried about a debt crisis, the best thing to do is to start early to act early on finding ways to reduce the debt burden for countries that are on have unsustainable debt, the longer you put it off, the worse it is," he added.
The acknowledgement by the World Bank president that we have to be worried about a developing country debt crisis, is very significant.
The combination of massive pandemic debts with rising interest rates, and rising prices is truly toxic.
The talk on the sidelines here at the IMF and World Bank meetings is that the rich countries told emerging economies not to worry about borrowing in order to spend to help suppress the pandemic.
Now those countries are wondering if these record debts will be written off.
Campaigning groups are preparing mobilisations over a pandemic debt jubilee. But there is silence from the rich country lenders, so far.
And there is a very new dynamic these days. The bankers to whom these sums are owed are no longer just in the West.
China is now, very broadly, owed as much as the entire collection of Western creditors known as the Paris Club.
How will it respond to calls for leniency on the repayment of loans?
Mr Malpass says of China: "They have different rules, for example, contracts that have non-disclosure clauses, meaning you can't share the terms with other people that makes it very hard to restructure those debts".
China has also secured its lending against ports and natural resources. Sri Lanka is a case in point right now.
The unwinding of all of this might not be orderly, and could have significant geopolitical consequences.
Earlier this month, the United Nations said that the Ukraine war had led to a "giant leap" in food prices, as they hit a new record high in March.
It came as the war cut off supplies from the world's biggest exporter of sunflower oil and the cost of alternatives climbed.
Ukraine is also a major producer of cereals such as maize and wheat which have risen sharply in price too.
The UN said "war in the Black Sea region spread shocks through markets for staple grains and vegetable oils".
The UN Food Prices Index tracks the world's most-traded food commodities - measuring the average prices of cereal, vegetable oil, dairy, meat, and sugar.
Food prices are at their highest since records began 60 years ago, according to the index, after they jumped nearly 13% in March, following February's record high.
Food commodity prices were already at 10-year highs before the war in Ukraine, according to the index, because of global harvest issues.
The World Bank has agreed to provide Sri Lanka with $600m in financial assistance to help meet payment requirements for essential imports, the Sri Lankan president’s media division has said
