By Vikram Kilpady
US-based South African billionaire Elon Musk recently made a $43 billion bid to buy Twitter. Musk may have a million reasons to take over Twitter, including the social media giant’s oft-criticized crackdown on “free speech.” But his plans didn’t go far, being shot down by Saudi Prince Alwaleed Bin Talal, a major Twitter shareholder. Yes, there is irony in that.
Since Twitter and whataboutery go hand in hand, many people on this social network pointed out that Musk’s offer almost equaled Sri Lanka’s $45 billion debt, prompting the billionaire to pledge the money to “save , repair, rebuild” this island-nation. Instead. These are the dreams of liberals in the age of social media wisdom. A new-age entrepreneur even suggested that Musk loan some money and rename himself “Ceylon Musk.”
Jokes are not enough and they do not apply balm to the meteoric disaster that has left Sri Lanka on the brink of insolvency, a situation that India was close to in 1991 before the famous IMF intervention and the devaluation of the rupee.
Given the vitriol reserved for ancient India, its factories and public sector enterprises have prevented it from becoming like its much smaller southern neighbour. India had industrial production to contribute to GDP, although it was low due to over-regulation of private industry. The current Delhi-Mumbai and Delhi-Kolkata Industrial Corridor projects attempt to undo this damage.
Sri Lanka has a current account deficit and a balance of payments crisis, both of which are pushing it into a spiral of worsening malaise. This means that he has negligible or zero GDP and he spends more than he earns. He needs money, probably from the IMF, which he is to meet later this month.
The island nation has been economically mismanaged for a long time, also due to sops and the like. It is aggravated by the fact that, given its low industrial production, more goods have been imported, making the outflow of dollars a constant and growing flow. With the boom in remittances in the mid-1980s due to the Sri Lankan diaspora in the West and the Persian Gulf, there was a further increase in imports of consumer goods.
This, coupled with structural economic problems, pushed Sri Lanka into more debt to meet its foreign exchange needs, which now needed consumer goods as well as infrastructure, raw materials and goods. India has at least some oil reserves, Sri Lanka has none. Imagine the need for more gasoline and diesel to power the last gasoline consumers of citizens, financed or imported by cousins from Kuwait or Bahrain.
Sri Lanka has only one USP, tourism, which is also its biggest employer. With the Covid pandemic hitting travel and tourism around the world, the verdant valleys of Sri Lanka have lain dormant as tourists and their hoards of dollars have vanished since the start of 2020.
Rice is a staple food in the country and a top shift in fertilizer policy has forced Sri Lankan farmers to switch to organic farming en masse, with no plan B for food stability. Now reversed, the policy has hit grain production. Rice was another item that had to be imported, adding to the bill.
The popular version of India’s debt crisis is that Sri Lanka borrowed heavily from China and built world-class ports. Ports were not so big hits among ocean liners. This meant a lot of money spent on a port that not all ships would dock at. Sri Lanka’s total debt to China is $3.9 billion.
In fact, Sri Lanka owes the largest amount of international sovereign bonds at $12.6 billion, followed by the Asian Development Bank, Japan and China, according to a Reuters report. International sovereign bonds are issued by governments, in this case the Sri Lankan government, to raise funds. Their reimbursement and their interest can aggravate the difficulties of a country already in the grip of a crisis of the balance of payments. Add to that the deep tax cuts initiated by Gotabaya Rajapaksa’s government after winning a landslide election in 2019, with Covid-19 waiting to hit the world later this year.
Several thousand Sri Lankans protested for nearly a month or more, expressing their anger at the Gotabaya government for not doing enough, and in time, to avert the crisis. The country has a reserve of $1.9 billion, most of which has been borrowed from India and China. Compare that to India’s foreign exchange reserves which stood at $634 billion as of February 1, 2022.
India has done its best for its neighbour. He has already sent $1.9 billion in cash, grain and fuel and, according to reports, is ready to pledge a similar amount again. Several Sri Lankan Tamils crossed the Palk Strait, under which lies the very famous Ram Setu, to Tamil Nadu. Its chief minister, MP Stalin, had called on Prime Minister Narendra Modi to ask India to help Sri Lanka so that his state would not end up having to take in economic refugees after resisting political refugees in the 1980s. and 90.
There is a proverb of uncertain origin about a man taking a horse to the river and his inability to get it to drink water. Will Sri Lanka heed India’s advice, which we believe is to snatch it from the clutches of the Dragon?
Sri Lanka’s new finance minister, Ali Sabry, has been adamant that the country sees itself as everyone’s friend; equidistant from China and India.
Given the history of India and Sri Lanka, any attempt by the former to become the White Knight will only heighten suspicion. The historical animosity of the Sinhalese majority towards Tamils in Jaffna has its roots in its perception of being treated as a quasi-vassal state by the Big Brother of the subcontinent. The cause of the Eelam Tamils and its political ramifications in Tamil Nadu led India to support its armed supporters in the 1980s, including the Liberation Tigers of Tamil Eelam (LTTE).
The dispatch of the Indian Peacekeeping Force (IPKF), which again was seen as a Big Brother movement by the Sinhalese even though it was signed by President Jayawardene, reversed the trend with the LTTE. As is known, the thoughtless IPKF had to flee from Sri Lanka like the Americans from Saigon. Sri Lanka subsequently wiped out LTTE terrorists in 2009 after a costly war with an insurgency lasting almost 40 years.
The way forward for India is to prevent the destabilization of the Gotabaya government, despite the stance of the Rajapaksas against India, and to continue supplying essential commodities as desired by the Lankan government. Any unilateral offer to write off all of its debt, for example, to “reclaim” it from China’s control may not backfire immediately, but has the potential to make it worse for Tamil minorities.
At the IMF, India reportedly supported the island nation’s request for a rapid financing instrument. An aide to Sabry said the IMF was initially lukewarm to their request, but India has made moves to seek help from its southern neighbor the money may well be coming.
Ahead of the IMF meeting, President Rajapaksa inducted a new cabinet stripped of elder brother Chamal, younger Basil and Mahinda Rajapaksa’s son Namal. Mahinda Rajapaksa remains Prime Minister.
As in the old Persian fairy tale of The Three Princes of Serendip, it is up to Sri Lankan rulers to apply Occam’s razor regardless of whether it sounds fortuitous. Friends are good, but you can’t abandon a neighbour, and a big one at that.
The author is the publisher, IndiaLegalLive.com and APNlive.com