DMPQ-Explain Srilanka’s economic crisis. Throw light on the measures India is taking to help it’s neighbour.

The Sri Lankan economy has been facing a crisis owing to a serious Balance of Payments (BoP) problem. Its foreign exchange reserves are depleting rapidly and it is becoming increasingly difficult for the country to import essential consumption goods.  The current Sri Lankan economic crisis is the product of the historical imbalances in the economic structure, the International Monetary Fund (IMF)’s loan-related conditionalities and the misguided policies of authoritarian rulers.

When Sri Lanka emerged from a 26-year long civil war in 2009, its post-war GDP growth was reasonably high at 8-9% per annum till 2012. However, its average GDP growth rate almost halved after 2013 as global commodity prices fell, exports slowed down and imports rose. Sri Lanka’s budget deficits were high during the war and the global financial crisis of 2008 drained its forex reserves which led to the country borrowing a loan of $2.6 billion loan from the IMF in 2009. It again approached the IMF in 2016 for another US$1.5 billion loan, however the conditionalities of the IMF further deteriorated Sri Lanka’s economic health.

  • Beginning January 2022, India has been providing crucial economic support to the island nation in the grip of a severe dollar crisis that, many fear, might lead to a sovereign default, and a severe shortage of essentials in the import-reliant country.
  • The relief extended by India from the beginning of 2022 totals over USD 1.4 billion – a USD 400 currency swap, a USD 500 loan deferment and a USD 500 Line of Credit for fuel imports.
  • More recently, India extended a USD 1 billion short-term concessional loan to Sri Lanka to help the country as it faces an unprecedented economic crisis.
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