 Hello everyone. Welcome to another international relations capsule for the Shankar AAS Academy. Today we tell the story of a lost paradise. Sri Lanka, which was once a prosperous island, very modern, sophisticated, a tourist attraction and many ways a cosmopolitan society. Of course, the Tamil issue in Sri Lanka started fracturing that society some years ago and it must have brought the economic situation to some trouble at that time. Now that the war is over and there should be now rebuilding the nation, now we hear that there are very serious financial crisis in Sri Lanka. It did not happen all of a sudden. We knew it was coming but somehow we felt that this would be managed by the Sri Lankan government and so the news that has just come in about the very serious situation or they are not being able to pay for their imports, very important imports from abroad and therefore prices have gone up of everything. The value of the Sri Lankan rupee has gone down dramatically and in fact a few people have even started leaving Sri Lanka to come to Tamil Nadu just to rescue themselves from the very difficult situation. I'm not an economist but when I was reading the story of Sri Lanka and its details, I heard what Shakespeare said many years ago, neither a borrower nor a lender be or often lawn loses both itself and friend and this is a lesson that Sri Lanka did not learn. If you borrow money from others and spend it on unproductive projects, unproductive I mean projects which do not create returns to pay for the pay the interest of the loan and the principle of the loan, then naturally that country cannot survive and this is what has happened over the years. The most important reason for this neglect on the part of Sri Lankan authorities is the temptation of the Belt and Road Initiative of the Chinese. As you all know the Belt and Road Initiative has embraced the whole world, most countries in the world have accepted or joined the BRI even while knowing that this is a grand plan by the Chinese to dominate the world. But the attraction of the BRI was that they were giving these countries, the countries which needed most soft loans to build massive projects and these appeared to be very generous, very soft loans but what happened was all that was built under the BRI were projects which were not really of great relevance to the country's concern. These projects were designed by the Chinese on the basis of the money they had to spare on the basis of the workers and laborers whom they can send to these countries and on the basis of excess material cement and steel and others which were accumulating in China. So it was a very China centric move but it deceived people into thinking that China is a very benevolent country and is lifting the people out of poverty. But many of us including India, Government of India warned that this could be a debt trap and that was one of the reasons why we kept out of it because these were projects which were not priority to us and at the same time they imposed on us and the money has to be paid and huge amounts of money will be paid for projects which do not require the kind of facilities that these countries need. Much lower costs they could have built much more relevant projects. So these massive amounts of money that they received and you all know about the Haman Tota Port, they could not pay back the money and therefore they have given away the port to the Sri Lankans for 99 years and thus virtually cleared the debts by giving away the port to Sri Lankans. So this is one of the reasons but this is not the only reason we cannot just play the Chinese there have been other developments. The pandemic hit Sri Lanka very badly as we all know and that was a big blow to tourism industry and therefore their foreign exchange earnings started drying up in 29 particularly in 2020. Then there was this bombing of the church which also resulted in dropping in the introduction of tourists because a terrorist attack definitely created havoc in the country. So combined with these two things it became much worse than before and then there was this very unwise move by the government to replace all their chemical fertilizers with organic fertilizers imported from China and completely replacing the existing architectural practices and this destroyed the tea industry. Tea and tourism were the major foreign exchange earners for Sri Lanka and tourism died because of the pandemic as well as the terrorist bombing and tea industry suffered heavily on account of this experiment with organic fertilizers and that was another big blow. So the conflict the Sri Lankan Tamil conflict then the pandemic then the bombing then the kind of situation that has developed over the economy and today it is unable to pay even the debt that is the debt servicing costs they don't have to have the money to pay. So the debt service cost which was 96% of the GDP in 2019 and 119% of the GDP in 2021. So which means your payment debt payment is more than all the money that you own that you that you create and the projection is that the public debt will remain 64% of the GDP till the year 2026. So you can imagine what the economic situations prices of essential import communities have risen to unprecedented levels and there is a trickling of as I mentioned the economic refugees to India. Sri Lanka has no choice except to reduce imports, adopt a tighter monetary policy and build foreign exchange reserves. These are easier said than done. President Gautabaya is in a fix of course his brother is the prime minister and the finance minister also a Rajapaksha. So he is thinking in terms of a dissolution of power. He can dissolve parliament after March 20th according to the constitution and he is counting the days for the dissolution rather than counting his dollars because he expects that the election will provide some kind of relief like a comic interlude in a tough tragic situation. So normally countries in such guide streets resort to loans from the international financial institutions like the IMF and the World Bank and the ADB etc. But with Sri Lanka's record of dynastic rule, poor governance and corruption, President Gautabaya was not very keen to go to the IMF. So instead he decided to ask friendly nations particularly China and India for additional financing to get over this problem. And later he also went to the IMF consultations. I'll come to that later. In his report on the consultations issued on February 25th, the IMF identified the possible reasons for the person's situation. The same that I mentioned earlier, the pandemic, vulnerability of external shocks and high risk to public debt sustainability, the Easter Sunday Terrorist Act 2019 and then policy changes including tax cuts in 2019 which contracted the GDP by 36% due to loss of tourism, loss of access to international sovereign bonds and market and the alarming deficits amounting to 10% of GDP. The civil war of course they don't mention but the civil war also resulted in the loss of several Tamil intellectuals and civil servants who used to be the backbone of the intelligentsia in Sri Lanka. So the IMF has recommended a tighter monetary policy, the building of international reserves and prudent management of infrastructure facilities like the Colombo port. Since none of these is easy to accomplish, no amount of possible assistance is going to rescue Sri Lanka from its tight spot. To restore macroeconomic stability and debt sustainability, IMF has recommended the implementation of a credible and coherent strategy covering both the near and medium term, a comprehensive set of policies with specific measures such as sustainable revenue-based fiscal condition solidation, fuel pricing policy, controlling inflation, restoring a market oriented and flexible exchange rate, development of social safety mechanism and other tough measures. And the IMF though it has complimented Sri Lanka on some aspects of the administration has been very critical and has predicted a bleak economic outlook for the future. As I mentioned earlier the IMF funds will take time to come but it will also come with conditionalities which the government may not be able to fulfill. So they first went to China and asked for a credit line of 2.5 billion US dollars to pay for all the imports so that ordinary people can live without starvation and difficulties. So the Chinese response was not immediate or favorable but the Chinese ambassador to Sri Lanka confirmed that China is considering a 1 billion dollar loan and a 1.5 billion credit line to purchase goods from China both of which would be new lines of financing without linking it up with the other projects like VRR. Because he gave no details as to when this money will come and how it will come and what the conditions would be. Of course they have the lessons of BRI and therefore much more cautious and in any case they have no choice and therefore they are considering as to how best they can bank on China. It is no secret that China's agenda is to subjugate Sri Lanka economically that we all know. India on the other hand has very quickly and promptly extended a 1 billion dollar credit facility to Sri Lanka to assist the island nation to enable it to procure food, medicines and other essential items. External Affairs Minister tweeted that this was a key element of the package of support extended by India and this was in the spirit of neighborhood first policy and India stands ready to give these US dollars 1 billion. And certainly the external affairs minister, Rishan Swiranka today to discuss this further and maybe there will be further enhancement of the Indian support. So you all know that we were at a disadvantage in Sri Lanka because of China's generosity and Sri Lankan's successive governments went to China rather than to India for any assistance that they required. But this time it has become very clear that China is not rising to the location and China is not benevolent like India to give credit lines because their agenda is very different. So the commentators are saying that this particular crisis has brought Sri Lanka closer to India rather than to China whether it is a temporary period or whether their heart has changed we do not know. But certainly they were getting much bigger concessions from China and therefore naturally they went after them. The successive Sri Lankan governments have been generally socialists in their approach and many of their projects are aimed at pleasing the public and this is something a characteristic of socialistic communist governments. Of course Sri Lanka is not communist but there is a tendency on their part also to use borrowed money to undertake populist measures to get more votes and therefore money is available in plenty but unless they are invested in viable projects with adequate returns for paying the interest as well as the principle the consequences will be disastrous. The present controversy in Kerala many of you may have heard about a high speed railway line it is known as the K line which would cost about one lakh crores of rupees is being pressed by the communist government and all this money is supposed to come from borrowings and the concern in the country in the state not only by the opposition but also the general public there are two concerns one is that a lot of land of the poor people will be taken to set up this huge project which will take a traveller from Tiruvannamthapuram to Kasargod in three hours now it is more than 12 or 14 hours and just for that is it worth building a super rail service and this is being pointed out as an obsession there has been resistance to the project but also from the opposition but also from the public on considerations of losing land and also about environmental degradation. The resistance move has only hardened the position of the government but unlike Sri Lanka Kerala has a supervisory authority in the central government will keep an eye on this and they will not be able to behave like Sri Lanka has done but the lesson that not only Kerala but also anyone who has development assistance program is that spending borrowed money on unproductive projects beyond its means and running the risk of endangering its people people's lives would be a lesson to learn from Lanka so we are looking at a period say 22 to 26 about four years time for Sri Lanka to set its house in order and hopefully nothing else will happen and they'll be able to put this together and the government will deal with corruption and corrupt bureaucracy and work hard and but these four years the people will suffer a lot we do not know whether there will be any discriminatory treatment of the thumbnails which may prompt them to quickly come to India as refugees there was some discussion about whether they would be accepted as refugees at this point but it is only a trickle not too many have arrived and people don't know how they arrived also poor people how did they pay for those boats and how did they arrive in Tamil Nadu is a mistake but as it happened in the past if this happens that'd be another dimension to be to the whole problem so it's a sad site of what was considered a paradise near India and a friendly country a democratic country at that is now gone to this situation let's hope some wise policies and some assistance from India and Sri Lanka they'll be able to regain the paradise which has been lost thank you well the percentage that they have to pay is very very high 64 percent of all your earnings paying back as debt relief that is not a helpful situation I'm sure they'll recover from it but but certainly this would be a very hard time for them yes that is an accepted fact even the Sri Lanka government will accept that when the whole thing is in the hands of one family or Rajabakshis they have been in politics for a long time and they have themselves admitted it and good bureaucracy has also been lost after the war because the Tamils have been sidelined I remember in the Sri Lankan mission in New York and wherever else I have served there are very good Tamil diplomats Sri Lankan diplomats who are of Tamil origin but none of them is there but of course you must have heard yesterday they've closed down all their embassies abroad because the expenditure and running these embassies is too much for them that may be a saving but they'll also dry up their contacts with institutional institutionary financial institutions and other governments to brief them about the problems and try to generate some financing so it'll be a lot it will be a gain on the savings that they accumulate to them by closing these embassies but at the same time in important countries they may have to maintain some office of some kind particularly in Washington in Beijing in Italy etc and that will still cost money yes remember the time when we had no foreign exchange at all but then after that we had the liberalization, globalization and dramatic growth in the economy. I was in Delhi during Mr. Chandrasheep's Prime Ministry ship then we did not have to have the money to buy anything and therefore we had to export our gold reserves in order to pay for the petrol and other necessities but the difference between Sri Lanka and India is Sri Lanka has no production of any kind they concentrate on tourism and therefore tourism does not create anything and the tourists stop coming that is the end of it and that is sudden and immediate and no food. Sri Lanka did not import milk at all can you believe it all their milk came from New Zealand and Australia so they have no infrastructure to produce anything for the people and so then what happens if the people are starving and they cannot get petrol so this is the situation they are in and therefore it's a basically a structural problem also because if they're not just being a country with a ship-to-mouth existence there are plenty of things in the market but none of that was produced in Sri Lanka and even the fertilizers if they were producing and having a good crop of tea suddenly was removed and because of some deal with China organic fertilizers was brought in and the agricultures did not know how to deal with it and also they did not know how to stop the fall in production and so the the best in the world comes from Sri Lanka and if they cannot sell it then what is the purpose what is the way in which they can recover so it's a little more gloomy than the kind of situation we have been through because of the fundamental difference in the economic structure so but I'm sure they'll overcome but the longer it becomes the crisis will become serious and of course in the Tamil areas there's already a political problem and the Sri Lankans believe that they are no minority or majority everybody is equal and therefore there's no need for them to do anything by way of a political settlement of the Tamil issue and Tamil leadership also is very weak and therefore it'll take some time for them to recover from the present situation and you know seek redressal of their grievances politically because all sudden done the war may have been won by the government but we know we know history this is a it's a cycle you may defeat somebody today but the idea does not die the idea has remained and unless you sold them by political means and meet their needs which are vital and legitimate then that will be the beginning of another strife so that is something which they need to understand but at the moment the focus is not on that that the form in the focus is people will have to survive they need to their need their essential goods and that is what they are trying with India's supply of material from India and China helping out and eventually IMF money will also come but then all that has to be fully utilized better utilized because if Mr Rajapaksha goes for an election now he may be dead because people will think that you know a non-government is better than a non-government but Premadasa the leader of the opposition is also trying to win the people's hearts so that'll be another event which will take place but on the whole unless you live within our means unless we do not accept money and spend it on unprotected purposes no country can survive but Sri Lanka is a small country people are homogeneous to a certain extent and intelligent people so they should be able to overcome it that's all that we can say. Thank you very much. Bye-bye.