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Tuesday, January 25, 2022

Joint development of oil tank farm by India, Lanka could alter dynamic of Delhi-Beijing rivalry

🔴 Delhi is also finalising an assistance package that will include a credit line for food and medicines to be purchased from India, and a second credit line to cover oil imports from India.

By: Editorial |
Updated: December 30, 2021 9:16:31 am
Delhi is also finalising an assistance package that will include a credit line for food and medicines to be purchased from India, and a second credit line to cover oil imports from India.

Sri Lanka may be in the middle of an economic meltdown, its worst since the 1970s, caused by multiple factors. The Easter killings of 2019 dealt a hammer blow to the country’s tourism industry, its main economic activity and source of revenue, a full year before the pandemic sealed its fate. Dwindling foreign exchange earnings have led to restriction on imports, which in turn has led to shortages of food essentials. Retail inflation is at a decadal high with skyrocketing food prices. An overnight switch to organic farming by government edict is threatening to decimate the paddy harvest and tea, Sri Lanka’s main export. The country has shut down its only oil refinery because it does not have the money to import oil anymore. Sri Lanka’s woes are compounded by its external debt. In 2022, the country reportedly will need to pay some $4.5 bn to service its sovereign bonds. Nearly half of Sri Lanka’s external debt is owed to international capital markets, and slightly below a quarter to international banks. Contrary to popular belief, China holds only about 10 per cent of Sri Lanka’s debt stock, as does Japan. The International Monetary Fund has bailed out the country several times in the past, most recently in 2016, but Sri Lanka exited the programme in 2019 because of the tough conditions, and is reluctant to approach the Fund again.

President Gotabaya Rajapaksa said earlier this week that there was nothing to worry as promised inflows from China and India would improve Sri Lanka’s forex reserves. Indeed, on Wednesday, the Central Bank announced year-end reserves of $3.1 bn, up from $1.6 bn last month, offering no explanation as to how the increase had come about, and triggering speculation that it had drawn on a March 2021 $1.5 bn currency swap arrangement with China.

Delhi is also finalising an assistance package that will include a credit line for food and medicines to be purchased from India, and a second credit line to cover oil imports from India. The key to this package is the finalisation by the Rajapaksa government of a long pending deal for a joint India-Lanka development of the strategic Trincomalee oil tank farm. Sri Lanka’s energy minister has said the deal will be finalised in January. If the assistance package including the modernisation of the oil tank farms does come through, it would signal an important shift in India-Sri Lanka relations, one with the potential to alter the dynamics of the Delhi-Beijing rivalry for influence in the Indian Ocean Region.

This editorial first appeared in the print edition on December 30, 2021 under the title ‘The moving triangle’.

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