India supersedes China as Lanka’s largest bi-lateral creditor

In the last 8-9 months Sri Lanka has been backed into a cul-de-sac; a blind alley that has made it imperative to depend on bi-lateral and multi-lateral lenders. Sri Lanka’s economy has also been challenged with mountains of external debt that remains unrepayable due to decimating foreign reserves. This has sebsequently impeded the country’s capacity to import fuel, essential consumer goods (such as medicine) and food items, in addition to hindering payments for power and gas imports.

The last few years has made it explicitly apparent that China has held the most reigns on the Sri Lankan economy, however, in the last few months India has supplanted China as Sri Lanka’s largest bi-lateral lender, having loaned a total of $968 million USD between April and August. In a bid to fulfill their ‘neighbourhood first’ policy, India has pursued assistance to all their neighbouring countries through financial aid for economic recovery, advancement of science and technology and general development.

Between 2017 and 2021, China and the Asian Development Bank have been Sri Lanka’s most sizeable bi-lateral and multi-lateral donors respectively. However, in a bid to supersede their regional competitor (China), India escalated their loan schemes to provide financial and food security to Sri Lanka. On August 22, India handed over 21,000 tonnes of fertilizer which will contribute to food security. India’s permanent representative to the UN, R. Kamboj stated at the UN General Assembly that India had donated $4 billion USD in food and financial aid.

What does this mean for Sri Lanka? In the arena of Asian politics, the ‘neighbourhood first’ policy has enhanced the regional influence of India and entitled its territorial neighbours to be indebted to India. To the vexation of the Asian hegemon China, India has made it a foreign policy objective to extend its infleunce over the economics and politics of their neighbours. This provokes an intense schism regarding Sri Lanka as India and China remain the island’s largest external creditors.

What of Lanka’s worsening financial crisis?

Sri Lanka is currently in the midst of negotiations with the IMF to secure an Extended Fund Facility, a long-term financial aid package to assist economic recovery in the island. The loan can only be secured on the condition that all of Sri Lanka’s multi-lateral and bi-lateral creditors come to a consensus that debt repayments can be defaulted on until the debt is sustainably restructured.