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External Affairs Minister S. Jaishankar’s virtual meeting with Sri Lanka’s Finance Minister Basil Rajapaksa,with an assurance that India will support Sri Lanka “in all possible ways for overcoming the economic and other challenges posed by COVID-19 pandemic”, was significant and timely.

Crisis faced by Sri Lanka

• A crucial week lies ahead for the Sri Lankan economy, when President Gotabaya Rajapaksa must make a decision on whether to service debts to bonds with an instalment of $500 million due on January 18, or to default for the first time ever, given the island’s precarious finances.
• A slump in GDP spurred by COVID-19 losses to tourism, exports and remittances,
• Foreign reserves that dwindled from $7.5 bn in 2019 to $1.6 bn in November 2021, and
• Pending debt repayments of more than $7 bn expected in 2022.

Help from India and China:

• In the preceding weeks, the Rajapaksa government reached out to India and China, which are most likely to help given their respective interests in the island.
• Chinese Foreign Minister Wang Yi, visited recently, who discussed:
• A full debt restructure of Sri Lankan borrowings.
• Beijing has also extended a currency swap arrangement of $1.5 billion.
• India decided on a “four-pronged” initiative:
• Lines of Credit (LoC) towards the import of fuel, food and medicines - the $1.5 bn LoC for essential imports is reportedly under way.
• Currency swap - India has extended $400 million under the “SAARC currency swap” arrangement.
• A partial deferral of a $500 million settlement from Sri Lanka by two months;

Way forward

It is important to note that in times of peril, New Delhi and Colombo have established a robust channel of communication and demonstrated an ability to act on promises quickly, proving that adage about friends (and neighbours) in need.