Prabhash K Dutta
China’s significant investments in South Asia have often come with a heavy price tag, as countries like Sri Lanka, the Maldives, and Bangladesh grapple with the consequences of Chinese debt. This has led to a complex dynamic where initial economic benefits are overshadowed by financial instability.
This also comes as a challenge for India as it tries to keep its unrivalled position intact in South Asia. The success of India’s approach will depend a lot on how it leverages economic ties, provides timely support, and adapts to shifting political dynamics.
It unravelled with Sri Lanka
In 2022, Sri Lanka was engulfed in a severe economic crisis that led to widespread protests and the ousting of President Gotabaya Rajapaksa. The crisis was exacerbated by substantial Chinese debt, which had become unsustainable for the country. The economic downturn was marked by soaring inflation and a significant drop in foreign reserves.
India stepped in as the first responder, providing crucial financial aid and securing an IMF package for Sri Lanka. This assistance was pivotal in stabilising the Sri Lankan economy, with inflation dramatically decreasing from 67.4 per cent in September 2022 to below 3 per cent today. India has a decades-long experience of managing inflation through fiscal policy interventions — something that Sri Lanka benefitted from since it sought New Delhi’s help in the face of stringent requirements set by agencies such as the International Monetary Fund (IMF) for a bailout deal.
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