President Anura Kumara Dissanayake’s inaugural State visit to India marks a pivotal moment in Indo-Lanka relations, as he and Prime Minister Narendra Modi conduct a comprehensive review of bilateral ties and explore avenues for deeper cooperation in key areas of mutual interest. This visit highlights the growing partnership between Sri Lanka and India, which has deepened since the onset of the economic crisis in 2022.
Sri Lanka’s economic crisis was far more than a financial disaster – it was a wake-up call for the entire South Asian region. As fuel queues grew, essential items disappeared from shelves, and political turmoil intensified, the island nation faced a future clouded with uncertainty.
Amid this chaos, a steadfast neighbour – India – stepped forward, demonstrating that partnerships can serve as a lifeline in times of dire need. What started as a lifeline has evolved into a broader collaboration across trade, energy, and infrastructure, cementing a strong bond between the two neighbours.
“Blood is thicker than water. It was natural for India to see what it could do to stand by Sri Lanka at this very difficult time,” said Indian External Affairs Minister Dr. S. Jaishankar.
A lifeline amidst collapse
Sri Lanka’s financial struggles reached a breaking point at the end of 2021, with its foreign reserves plummeting to $ 1.6 billion – barely enough to cover a month’s worth of imports. The subsequent default was unprecedented, plunging Sri Lanka into economic chaos.
Under its ‘Neighbourhood First’ policy, India extended nearly $ 4 billion in financial assistance to Sri Lanka. The Reserve Bank of India (RBI) provided a $ 400 million currency swap, along with $ 500 million in deferred trade liabilities under the Asian Clearing Union.
Additionally, credit facilities from India’s Exim Bank and the State Bank of India enabled the continued import of essentials such as fuel, food, and pharmaceuticals, amounting to $ 1.55 billion.
India’s assistance accounted for over 80% of Sri Lanka’s merchandise imports from India that year and marked a significant increase in its share of foreign debt disbursements, which surged to 38% in 2022 compared to less than 10% in previous years. This support offered critical relief as Sri Lanka contended with default risks and deliberated seeking International Monetary Fund (IMF) assistance.
Debt restructuring: India takes the lead
When Sri Lanka defaulted on its sovereign debt, its path to recovery hinged on restructuring external borrowings. Its external borrowing options narrowed sharply, primarily limited to multilateral lenders whose support depended on progress in restructuring external debt.
By mid-2022, China held 40.1% and India 15% of Sri Lanka’s bilateral debt, collectively accounting for over half of Sri Lanka’s bilateral obligations, exceeding the Paris Club’s share of 41.7%. With bilateral creditors like China and India holding substantial shares of Sri Lanka’s debt, negotiations were complex.
Unlike the Paris Club’s standardised debt relief processes, negotiations with non-Paris Club creditors such as China and India required a customised platform to align terms acceptable to all parties.
While China accounted for a larger share of Sri Lanka’s external debt under restructuring 27% compared to India’s 4%, India played a prominent political role in the discussions. A significant portion of India’s 2022 emergency assistance, including $ 893 million in credit facilities, was excluded from restructuring.
Nevertheless, India was the first to provide the crucial financing assurances needed for the IMF programme’s approval in March 2023. In contrast, China’s similar assurances came only in early March this year, drawing criticism for perceived delays. India’s prompt action was widely praised.
In April 2023, the Official Creditor Committee (OCC) was established to oversee bilateral debt restructuring, with India, Japan, and France serving as Co-Chairs. Notably, China did not hold an official seat.
Despite its smaller share of the restructuring portfolio, India played a key diplomatic role. It restructured its 2022 financial support to Sri Lanka by consolidating the RBI’s $ 400 million currency swap and $ 2 billion in trade credit into a $ 2.6 billion long-term currency swap.
This revised arrangement reduced repayment pressure on Sri Lanka by extending the repayment schedule from November 2024 to August 2026, providing vital relief to stabilise the country’s foreign reserves during the post-crisis recovery.
Energy cooperation: Harnessing renewables
One of the most dynamic aspects of India-Sri Lanka collaboration lies in the energy sector, particularly renewable energy. As Sri Lanka claims to seek to transition from its reliance on fossil fuels, India has emerged as a key partner in developing sustainable energy solutions.
On 1 March, the Sri Lanka Sustainable Energy Authority (SLSEA), the Sri Lankan Government, and India’s U-Solar Clean Energy Solutions formalised an agreement to establish hybrid renewable energy systems on the Nainativu, Neduntheevu (Delft), and Analaitivu islands in the Palk Bay.
The project, with a total renewable energy capacity of 2,230 kW, will be financed through a $ 11 million grant from the Indian Government. This initiative, backed by Indian funding, reflects the priorities outlined in the India-Sri Lanka Economic Partnership Vision and underscores the growing strategic ties between the two nations.
In addition to the Colombo West International Terminal project with the Adani Group, Sri Lanka is negotiating the second phase of the Mannar renewable energy power plants, approved by the Cabinet in March 2022. This 500 MW wind and solar project is situated on Mannar Island in the Northern Province, an area designated as an ‘Energy Development Area’ by the SLSEA.
Unlike the port deal, this project has faced significant controversy. Critics argue that Adani Green Energy Ltd. risks monopolising electricity generation in the region, raising concerns about potential exploitation of partner states.
For example, Bangladesh has been criticised for its reliance on electricity from the Adani Godda power plant, reportedly paying $ 0.1052 per unit, including wheeling charges, significantly higher than the $ 0.0778 per unit charged by the Sembcorp Gayatri coal power plant in Andhra Pradesh, as estimated by the Institute for Energy Economics and Financial Analysis (IEEFA).
Beyond the monopoly concerns, the project faces substantial environmental and community pushback. Local fishing communities have raised alarms about the ecological impact of earlier wind power developments in the region.
Fishermen have noted that before the wind farm was set up, they had been able to engage in fishing within two kilometres of the coast, but now all the fish have disappeared due to the sound and vibration.
However, the Environmental Impact Assessment (EIA) report downplays these concerns, asserting that turbine noise is unlikely to affect fish populations, although it acknowledges that the noise could moderately disturb fishing activities at night when ambient noise levels are low. Environmental experts have also voiced concerns about the broader ecological impact as well.
While Sri Lanka benefits from India’s commitment to renewable energy development, these concerns highlight the importance of ensuring competitive pricing and transparency in regional energy collaborations. For Sri Lanka, striking a balance between leveraging India’s support and maintaining sovereignty in its energy policies will be critical to achieving a sustainable and equitable energy future.
Turning crisis into opportunity?
What started as a crisis response has grown into a strategic alliance, covering trade, energy, tourism, and diplomacy. India’s assistance in debt restructuring, energy cooperation, and boosting tourism highlights a shared commitment to stability and prosperity in South Asia.
What remains to be seen is whether this partnership can increase regional cooperation in the world’s least integrated region.
(The writer is the Programme and Research Officer at Arutha. Arutha is a Colombo-based policy think tank focused on economic research and communication with a special interest in public debt and taxation. Its economic civic education initiative, Default LK, was established during Sri Lanka’s first-ever sovereign default in 2022)
Total bilateral and ECA-backed debt
*Paris Club members – Japan, France, Korea, the Netherlands, Germany, the UK, Austria, the US, Spain, Sweden, Russia, Denmark, Australia, Canada, and Belgium
*Other Non-Paris Club members – Saudi Arabia, Kuwait, Iran, Hungary, and Pakistan
Source: CBSL (2023), investor presentation