India will have to take the lead
The scenes beamed around the world from Sri Lanka, in which a vast sea of protestors caused the nation’s president to flee and then invaded the presidential palace, are stunning even by the standards of the country’s tumultuous politics. It has been reported that President Gotabaya Rajapaksa and Prime Minister Ranil Wickremesinghe have agreed to resign their posts. But there is a major trust deficit when it comes to the president in particular and many of the protestors and others are doubtful as to whether he will in fact leave his post as promised. This comes as the economic crisis in the country showed few signs of improvement. Sri Lanka had stopped paying its bondholders, in what many saw was a harbinger of broader sovereign debt market troubles to come. The links between the troubled economy and the complete loss of faith in the political authority are obvious —but the latter makes it much harder for Sri Lanka to address the former without help from outside.
There are two horizons along which India and the global community will have to address the questions thrown up by Sri Lanka’s economic and political crisis. On the one hand, in the short term, humanitarian suffering and a political vacuum must be avoided. Money to pay for immediate and essential imports must be found, and New Delhi must support a peaceful transfer of power to whatever cobbled-together coalition of opposition politicians wants it under these circumstances. Yet the longer-term concerns must also be given attention. The question of whether Sri Lanka’s debt, as currently structured, cannot and will not be serviced, must be answered. If it is indeed unsustainable, it will need to be restructured.
Yet it would be glib to call for restructuring this debt without a clear solution to the central problems in all sovereign debt restructuring today. Will multilateral money bail out Chinese state-linked bondholders? Do loans from state-linked banks and enterprises in the People’s Republic of China count as state lending, subject to one set of rules? The West seems to think so, while Beijing argues that these loans should be treated as if they were from the private sector and thus given priority in repayment. A solution to this problem in Sri Lanka’s case is vital in that it will set precedents for other sovereign debt restructuring that appears inevitable, from Ghana to Laos.
Even though India has clear budgetary constraints, it has already offered financial assistance to Sri Lanka. It must now take up a leadership role in addressing these problems without waiting for the global community. In the end, Sri Lanka is small compared to most Indian states, and so a bailout cost will not be prohibitive. Plus, bailing out a fundamentally productive neighbouring country is clearly in the national interest. Much stability could be restored, in addition, just by in-kind shipments and by guarantees with a much lower impact on the Indian Budget. There was talk of the outgoing prime minister convening a conference of the country’s creditors, including India, Japan, and China. Such a meeting should certainly go ahead even if the current prime minister himself is not around to conduct it. If necessary, it should be convened by India and focus on a long-term and replicable solution to Sri Lanka’s debt problem.