A serious economic crisis due to the depletion of foreign reserves has hit Sri Lanka and in December 2021, the Gross Official Reserve was not enough for two months' imports. Meanwhile, Sri Lanka also has a debt service commitment to the tune of approximately US$ 5-7 billion during July 2021-July 2022. One of the options the Sri Lankan Government has chosen to deal with the crisis is to approach bilateral partners for loans and currency swap facility. India, China, Bangladesh and even Pakistan and Qatar have agreed to assist the country. India has so far extended the largest contribution to the tune of US$ 2.4 billion. It remains to be seen if New Delhi, through this substantial assistance, would be able to garner greater influence in Sri Lanka where China has had made a significant footprint.

Indian Assistance to Sri Lanka
India is committed to “support Sri Lanka in difficult times” and in December 2021, New Delhi announced “four pillars of co-operation” with Sri Lanka i.e. (a) Indian economic assistance including US$ 400 million under the SAARC currency swap arrangement; (b) deferral of A.C.U. settlement of US$ 515.2 million by two months; (c) US$ 500 million for importing fuel from India; (d) US$ 1 billion for importing food, essential items, and medicine. Additionally, Indian Oil Corporation has supplied 40,000 Metric Tonnes of fuels on 60 days credit. These have provided Sri Lanka breathing space to deal with the foreign reserve crisis.

While the assistance in the form of currency swap and loans from bilateral partners provides short-term relief to the Sri Lankan crisis, the government needs non-debt creating foreign currency inflow to overcome the challenges emanating due to depletion in foreign reserve. That is possible only if the main foreign currency earning sectors in the Sri Lankan economy namely, tourism, remittances, and export are improved. In that context, India and Sri Lanka are discussing ways and means to attract Indian tourists and boosting Sri Lankan tourism. Due to movement restrictions in China during the pandemic, Sri Lanka has little hope to receive tourists from that country. Russia-Ukraine crisis has also caused uncertainty about the Ukrainian and Russian tourists who until now contributed immensely to Sri Lankan tourism. Sri Lanka is, therefore, relying heavily on India as it is one of the main source countries for Sri Lankan tourism. India has agreed to provide required assistance in this regard.

“Transactional to Strategic Partnership”
Indian assistance at this time of need has been well appreciated and Sri Lankan Foreign Minister GL Peiris has said that the relationship between India and Sri Lanka has evolved from a “transactional into a strategic partnership.” In addition to the economic assistance to deal with the foreign crisis, the “four-pillars of economic cooperation” also talk about energy cooperation as part of which MoU was signed to jointly develop the Trincomalee Oil Tank Farm. If the 99 oil tanks in the farm are modernised it can benefit both countries. Joint development of the oil tank farm will enhance Sri Lanka’s energy security. Sri Lanka can also be turned into a regional petroleum hub by developing the farm and contribute to the region’s energy security. Both countries are also having joint ventures in the port sector through the involvement of the Adani group, an Indian private company. Positive momentum in the Colombo Security Conclave (CSC) is another important aspect of the India-Sri Lanka “strategic partnership.”

Addressing the concerns in bilateral relations-Key to maintaining good relations
The high-level engagement between the two countries since December 2021 indicates that there is willingness to maintain positive trajectory by both governments. In that regard, they agreed to address issues and concerns in the bilateral relations. According to the Foreign Minister of Sri Lanka the only “flashpoint” in the bilateral relations is the fishermen issue and he had hoped that the upcoming meeting of the Joint Working Group on fishermen would make some headway in this regard. However, the fishermen issue is too complicated to be resolved very quickly.

From Indian perspective, the increasing Chinese influence in Sri Lanka is a major concern in bilateral relations. Sri Lanka, however, considers India’s concern as irrational and has argued that it would never allow a third party to use its territory to do anything detrimental to India’s interests. Last year a deal with the Chinese company to install hybrid energy project in the three islands in the Northern Province of Sri Lanka was canceled keeping in mind India’s concern. Sri Lanka believes the Chinese presence in the Island is mainly for economic purposes and it does not have strategic interests.

Indian influence in Sri Lanka?
However, the visit of the Chinese Ambassador to the Northern province of Sri Lanka in December last year and reaching out to the Tamil population through religious diplomacy shows that China has a bigger ambition than just having a mere economic presence in Sri Lanka. Chinese Foreign Minister Wang Yi’s proposal to set up a forum on development of Indian Ocean Island countries and invitation to Sri Lanka to take a lead role suggests that China is contemplating to provide an alternative to the CSC. Sri Lanka has not reacted to the proposal yet.

At this critical juncture when Sri Lanka is seeking economic assistance as well as support at the 49th regular session of the UNHRC, it would not like to offend India. At the same time, Sri Lanka would not like to allow India to have an unfettered strategic influence in Sri Lanka due to the old perceived or misperceived fear of losing strategic autonomy despite receiving substantial economic assistance from the latter. The “minority complex” of the Sinhala majority community will also deter India to have a significant influence at a time when the incumbent Government of Sri Lanka is propagating for a “One-country, one law” policy.

Dr. Gulbin Sultana is an Associate Fellow at the Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA). Views expressed are of the author and not of the Government of India or MP-IDSA.