By TON Research Desk

All South Asian countries, not just Sri Lanka, are facing economic problems such as a shortage of essential commodities, rising inflation, a fall in the value of the local currency against the US dollar, and social and political unrest triggered by economic issues. Only the intensity varies.

The roots of these domestic problems lie both in the domestic sphere and the international sphere. International relations could either help solve these politico-economic problems or themselves become reasons for tension. South Asian nations, barring India, are heavily dependent on foreign aid.

The economic problems of Sri Lanka are currently facing are entrenched in internal misconduct over many years. Corrupt tax policies, poor tax collection, unrestrained borrowing in dollars to fund non-income generating projects, unnecessary lockdowns with severe constraints during the pandemic, unjustifiable tax concessions, and irresponsible recruitment to an already bloated government. Ultimately, this led to Sri Lanka’s defaulting on international loan repayments and going to India and the rest of the world.

China has been one of the largest creditors to Sri Lanka for 19.9% of the island’s Public and Publicly Guaranteed Debt (PPG), which includes commercial lending to government and State-owned enterprises. Chinese PPG debt is 20% of the debt service. The Foreign Currency Term Financing Facility (FCTFF) extended by China enabled the government to use the money without conditions and that helped it muddle through the financial crunch in 2020 and 2021. In April 2022, debt repayment became impossible and the government had to default to the extent of US$ 26 billion.

China refused to restructure the repayment of the debt owed to it. Instead, it asked Sri Lanka to accept re-financing of the Chinese debt, be financially prudent, open the country to Chinese FDI and sign an FTA with it. But Sri Lanka is unable to meet these conditions and is hoping that China will soon relent and revise its rigid conditions.

Although India’s GDP is growing by 8.7% after a slide during the pandemic, it continues to be burdened by poverty which is being managed by costly subsidies and aid. India has banned the export of wheat fearing a shortage. There is a fuel shortage that is being met by importing from Russia confronting sanctions held by the US, and India. While the economy is in tatters, youth unemployment is also growing.

Against this background, India’s capability to help Sri Lanka is limited. New Delhi is now dragging its feet on giving Sri Lanka an additional US$ 500 million for fuel. New Delhi is eagerly waiting for the IMF’s bailout for Sri Lanka, as that will inspire the West to come to Sri Lanka’s aid and relieve India of a part of the burden.

Meanwhile, India has been using humanitarian aid as a grip to gain some investment projects from Sri Lanka to make up for the 10-year drought of projects caused by Colombo’s pro-China tilt. India is wanting projects in the renewable energy, infrastructure, and connectivity sectors. However, these have suffered opposition from nationalists who see foreign investments as an abridgment of national sovereignty.

The opposition Samagi Jana Balawegaya (SJB) leader Lakshman Kiriella has warned of an agitation if the Trincomalee harbor is given to India for development. There has been opposition to two renewable energy projects given to India’s Adani group for a US$ 500 million investment.

Pakistan too is in awful passages, in frantic need of an IMF bailout package. The need is for a renewal of the hindered US$ 6 billion IMF capacity and the instant relief of US$ 900 million as forex assets have fallen below US$ 10 billion, enough only for 45 days of imports. But getting an IMF loan comes with strict conditions, which Pakistan would find hard to meet. It has to reduce the budget deficit, improve tax collection, phase out electricity subsidies and reduce forex market intervention by the federal bank.

The current economic crisis in Pakistan is primarily attributed to its extensive spending on non-developmental and economically unviable projects like the China-funded China-Pakistan Economic Corridor (CPEC). China had lent Pakistan US$ 64 billion for CPEC, which is not yielding results yet. However, China recently lent US$ 2.3 billion to help Pakistan tide over the forex crisis.

Bangladesh is also facing macroeconomic despite its South Asian success story marked by high inflation, an escalated current account deficit, bad growth in payments. However, in terms of foreign liability, Bangladesh is not under stress. The government is aware that it must be judicious since many of the megaprojects are foreign-debt-financed and foreign debt has risen. There are also concerns over the lack of proper feasibility studies and the cost and time overruns of foreign-funded projects.

In 2015, China surpassed India as Bangladesh’s largest trading partner. China is heavily involved in infrastructure projects which are worth more than US$ 10 billion. Bangladesh is set to receive an investment worth US$ 40 billion from China. China supplies raw materials to Bangladesh’s main industry garments.

The US is chiefly disturbed over China’s entrance into Bangladesh and is trying to persuade it into becoming part of the anti-China nautical security “Indo-Pacific” alliance. However, Dhaka has told Washington that it will consider joining only if there is a clear economic aspect to the Indo-Pacific project which is now palpably military.

Nepal has problems with the US, China as well as India. By virtue of its historical, religious, and cultural ties with Nepal, India has vested interests in Nepalese politics and acts to safeguard them. India uses the fact that Nepal is a landlocked country with easy access to the outside world only through the Nepal-India border. However, it is not liked in Nepal, despite India’s substantial developmental aid. Encouraged by China, Nepal is trying to find passages via the northern border with China.

There are Sino-Nepalese power generation projects. China has also offered duty-free treatment for 98% of the goods imported by China. Separately from Pakistan, Nepal is the only other South Asian country that is part the China’s Belt and Road Initiative (BRI).

The US forced Nepal into joining its Millennium Challenge Corporation (MCC) developmental compact. The US$ 500 million MCC was seen by Nepal as against its sovereignty. It was ratified very reluctantly. However, Nepal declined to receive the US State Partnership Program (SPP), which came under the US Defense Department. Nepal, like Bangladesh, is opposed to defense pacts that might provoke neighboring China.