Sri Lanka: Managing macroeconomic minefield in 2022


The mood in Sri Lanka at the end of the year 2021 is not unlike the aftermath of the Boxing Day tsunami that struck the island nation 17 years ago, on December 26. The tsunami attributed to the 9.1 Richter earthquake in the Indian Ocean took a toll of over 35,000 lives including 4000+ missing persons and a million and half people were displaced from their homes. International community swiftly rallied to provide relief to Sri Lanka. Though India’s own coastal areas had also faced the wrath of the tsunami, causing the death of over 10,000 lives, it was the first country to provide relief to Sri Lanka. According to Washington Post, “an Indian navy medical team arrived in Colombo within hours of the tsunami, and four ships docked at several ports across the country by the end of the following day…. a team of Indian divers, meanwhile arrived in Galle to begin raising sunken vessels that were preventing relief ships from entering the port; with help from the Sri Lankan Navy, the job was completed in eight days.” The report also said, “Over the last three weeks, India has deployed 14 ships, nearly 1000 military personnel and several dozen helicopters and airplanes to its devastated island neighbour…..Indian officials described the relief mission as the largest outside their borders since independence from Britain in 1947.”


At the end of 2021, Sri Lanka is facing devastating effects of another kind, which are no less than the aftermath of the 2004 tsunami. The explosive mix of the global COVID 19 pandemic has taken its toll, not only on Sri Lankan people, but on the national economy. The government coffers are empty and its mounting international debts threaten to prolong its agony during 2022. However, unlike the aftermath of 2004 tsunami, nations are not rushing to the aid of Sri Lanka to speed up the process of its recovery. Sri Lanka seems to have lost much of the international goodwill it enjoyed in 2004; when the international community was prepared to underwrite the peace process with development aid. Of course, the changed international attitude can be attributed to the changes in the global and regional strategic scene. The entry of China, more powerful than ever, in the Indo-Pacific has resulted in the realignment of big power footprints in the region. Sri Lanka finds itself in the eye of this dynamic scene after the formation of the Quadrilateral framework of four nations - India, USA, Japan and Australia. China’s increasing domination of the Indian Ocean region and its adverse impact on India-China relations is another issue of concern for South Asia.


However, Sri Lanka’s internal political scene, has not changed much now; probably it is a little worse than in 2004. A bit of soul searching will probably show that political parties have frittered away a decade plus of peace after the end of the LTTE led Tamil separatist insurgency. It provided an opportunity to build a vision driven muti-ethnic nation. In 2021, we saw the ascent of the Sinhala Buddhist majoritarianism; it is now stridently calling the shots in governance. The rise of Buddhist chauvinism and militarism in tandem could turn the year 2022 turbulent, if course correction is not made by President Rajapaksa. There are rumblings of discontent at his style of governance within the ruling SLPP-SLFP political coalition. This could get worse in the coming months, if action is not taken to curb runaway food prices and shortages of fuel, power and other essentials.


In short, 2022 is going to be an eventful year for Sri Lanka. Much would depend upon how the government manages its macroeconomic issues. In this respect, the two-day visit of finance minister Basil Rajapaksa to New Delhi early in the month is interesting. He had two rounds of talks with his Indian counterpart Ms Nirmala Sitharaman and External Affairs minister S Jaishankar. He also met with the minister for petroleum Hardeep Puri and NSA Ajit Doval. He sought India’s extended lines of credit for a host of supplies – food, medicines, fuel etc - and Indian investment, which had been lagging.


But apparently, during the talks India had expressed its economic concerns over unresolved Indian investment issues like the Trinco Oil Tank Farm, as well as, security concerns over increasing Chinese footprint in Sri Lanka. Sri Lanka High Commissioner to India Milinda Moragoda, saw the talks as part of Colombo’s dialogue process with New Delhi. Speaking at an Indian virtual seminar, he said “Of course, given the nature of the power play in this region, Chinese presence can be looked at differently. In that context, I think our dialogue with India is what is important – to build trust and to understand each other. And may be, have some red lines which both sides will not cross.” He further added that India has not told us not to accept Chinese investment. “But as long as the investment does not create any strategic issue in India, we should be able to entertain that investment.”


Apparently, the talks nudged the energy ministry to speedily conclude the negotiations with India regarding the development of Trinco Oil Tank Farm. Energy minister Udaya Gammanpilla announcing the successful conclusion of negotiations said a total of 14 oil tanks at the Farm currently operated by the Lanka Indian Oil Company (LIOC) would be leased out them for another 50 years. He said 61 other tanks will be managed by the newly established Trinco Petroleum Terminals, a joint venture of the State-owned Ceylon Petroleum Corporation (CPC) and the LIOC. There is widespread expectation in Sri Lanka now that India would release a $500 million line of credit for import of petroleum products. We can probably expect other help from India during the month, as Sri Lanka bridges the existing credibility gap with India. Finance Minister Basil Rajapaksa is scheduled to visit the Gujarat investment summit in the first week of January. Some Indian investment announcements can be expected to be timed with his visit.

The Central Bank of Sri Lanka (CBSL) has announced that the country’s official reserves as on December 21 has increased to $3.1 billion and “more inflows” were expected to be realised by January 2022. It expected it to remain at this level till the end of the year. The statement did not reveal the source of inflows. However, media reports quoting forex market sources said reserves had plunged to less than $1.5 billion by mid-December and the latest position given by the Bank was following the drawdown of Yuan 10 billion ($1.5 billion) swap arrangement with the Peoples Bank of China. However, CBSL has said its figure does not include the swap, though opposition MP and economist Dr Harsha de Silva has questioned CBSL reasoning and asked for details.


Amidst Sri Lanka efforts to energise its relations with India, it is interesting to note China taking baby steps to improve its image in Northern Province, where the Tamils generally consider China as pandering to the Sinhala majority. These measures come in the disastrous aftermath of Sri Lanka’s rejection of organic fertiliser of Chinese origin for substandard quality. Chinese ambassador to Colombo Qi Zhenhong made a three-day visit to Northern Province in mid-December. The photo ops of the ambassador's bare-bodied darshan at the Nallur Temple got wide coverage. He visited the Jaffna Public Library, which was rebuilt by India, after it was destroyed during ethnic conflict. Jaffna Mayor Viswalingam Manivannan took him round the library. The envoy donated five laptops and books in different languages to the library.


According to the Chinese embassy statement, he also met with Governor Jeevan Thiagarajah and discussed on how to enhance cooperation between China and Northern Province and improve the livelihoods of the Tamil community. The Governor invited more Chinese investment and assistance in aquaculture, fishing equipment, industries and IT etc in the Northern Province, which received positive response by the Chinese delegation. The Ambassador donated five sets of mobile water purification plants, one for each of the districts. He also visited along with fisheries minister Douglas Devananda the Chinese company running sea cucumber hatchery in Ariyalai. He was “impressed to learn that the Chinese company has created “thousands of jobs for local fishermen, brought millions of US $” and transferred technology to Sri Lanka.


The Farm has also been an important studying and practising base for government officials, local fishermen and students from University of Jaffna etc. The company also raised a request to the Ministry of Fisheries and other relevant Government authorities to expand the farming to attract more FDI. He also took a team of Sri Lankan and Chinese media persons on a tour of the Chinese owned New Silkroad Foodstuff factory in Mannar. The ambassador also donated to local fishermen food parcels, fishing gears and masks worth Rs 20 million.


We can expect the Chinese to get into more and more active diplomacy mode in IOR in 2022. The Chinese foreign ministry has announced that foreign minister Wang Yi will be visiting the Maldives and Sri Lanka in early January. It is significant he will be visiting Eritrea, Kenya and Comoros from January 4 to 7, before his visit to India's neighbours.

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