Sri Lankan Finance Minister Basil Rajapaksa begins his crucial discussions with Indian leaders Wednesday in the backdrop of an unprecedented economic and fiscal crisis in the island nation. Dubbed as "powerhouse" - de-facto Vice President to one elder brother and de-facto Deputy Prime Minister to another brother - Basil has been assigned the task of winning India’s confidence and influencing New Delhi to open purse strings to bail out the economy of Sri Lanka.

What may make the task easier is the recent warmth in the bilateral relations. This uptrend is an acceptance of the existence of strategic imperatives by both countries, though some experts mistakenly interpret it merely as a consequence of the current economic crisis in Sri Lanka. Though differing policies dictated by national interests at times require both countries to make decisions leading to conflict with each other, geopolitical realities have compelled each to ensure, it would not adversely affect their strong bilateral friendship and cooperation.

Since the early 1980s, bilateral ties between India and Sri Lanka are a series of ups and downs. However, before the relationship plummets to rock-bottom, one factor or the other surfaces to compel New Delhi and Colombo to salvage it and place it back on track.

The improvement in bilateral ties can be credited to the regular visits by Sri Lankan ministers and senior Indian officials to each other's capitals after Prime Minister Narendra Modi acceded to President Gotabaya Rajapaksa’s request for urgent payment restructuring to bail out the Sri Lankan economy which faced a severe foreign exchange crisis. 

When Modi comes to Sri Lanka at the end of March, the two leaders will be able to take stock of the recent measures taken to enhance bilateral cooperation and take decisions to speed up the process. Several areas are identified for close economic cooperation, in the integrated country strategy road map prepared by High Commissioner Milinda Moragoda. During Finance Minister Basil Rajapaksa’s last visit to New Delhi two months ago, these issues were discussed with Finance Minister Nirmala Sitharaman and External Affairs Minister Subramaniam Jaishankar.

On the plus side, India and Sri Lanka have agreed to increase defence cooperation to safeguard the security of commercial sea lanes and to give security assurance to India. According to Indian experts, Trincomalee has been of special strategic significance to India given its geographical location. India and Sri Lanka signed a deal in January to redevelop Trincomalee’s oil tank farms which are the result of an arduous effort undertaken by both neighbours over the last few years.

Modi visit to Jaffna

After Basil Rajapaksa's current visit, Modi is likely to fly from New Delhi to Jaffna to mark the reopening of Palaly Airport for commercial operations end of this month. He is also scheduled to open the Cultural Centre in Jaffna before flying to Colombo for bilateral talks and also to participate in the summit meeting of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC).

The two countries are exploring maritime security agreements that will strengthen India’s interests, particularly around the eastern Trincomalee harbour. This mechanism includes the supply of Dornier surveillance aircraft for the Sri Lanka Air Force and a ship repair dock for the Sri Lanka Navy in Trincomalee.

Sri Lanka is very keen to obtain intelligence to curb drug trafficking and human trafficking and welcomed the proposal to post a Sri Lankan Navy officer at the Intelligence Fusion Centre in Bahrain. This centre is an intelligence-sharing office initiated by the US Navy to combat international terrorism, the narcotics trade and ensure safe maritime passage for commercial vessels in the region. All these areas are of immense importance to Sri Lanka.

Last week, an agreement was signed between India's National Thermal Power Corporation and the Ceylon Electricity Board to set up a renewable solar power project in Sampur. This was to counter the coal power project, initially proposed there now shelved owing to environmental concerns. As this issue is finally settled, several other Indian economic projects are also expected to materialise from the discussions during the next high-level meeting between the two countries.

Under an understanding reached during Basil Rajapaksa’s last visit to New Delhi, the Reserve Bank of India (RBI) issued a notification to operationalise the USD 500 million line of credit provided to Sri Lanka to buy petroleum products. Last month, the Export-Import Bank of India (Exim Bank) entered into a pact with Sri Lanka to provide the USD 500 million line of credit for financing the purchase of petroleum products. Out of the total credit by Exim Bank, goods, works and services of value of at least 75 per cent should be supplied by the seller from India, the RBI said in a notification.

However, Sri Lanka has the option of getting the remaining 25 per cent of goods and services from sellers outside India. The agreement under the LoC (line of credit) is effective from 18 February 2022. Under the LoC, the terminal utilisation period is six months from the date of signing the LoC agreement or other extended date agreed at the request of the borrower.

India credit line to Lanka

The Line of Credit from India will provide Sri Lanka with much-needed foreign exchange to purchase essential goods. This will ease the current severe foreign exchange crisis. The country is also grappling with a shortage of many essential goods due to the lack of dollars to pay for the imports and the Indian LoC will help Sri Lanka to get over this crisis.

Necessary measures to operationalise the USD 500 million credit line from India for the purchase of petroleum products is underway in accordance with the understanding between the governments. Sri Lanka is set to finalise another credit facility with India for food, medicine and other essential items which would help in facing the crisis.

The visit of Finance  Minister Rajapaksa to New Delhi is expected to put bilateral ties and cooperation on the right track and any residual issues can be tackled by President Rajapaksa and Prime Minister Modi during the latter’s scheduled visit to Colombo end March-early April.

(The writer is Director, International Media, Presidential Secretariat, Colombo. Views are personal. He can be contacted at sugeeswara@gmail.com)