Exporters worried about stuck payments as Sri Lanka declares economic emergency

7th Sep,2021

Exporters worried about stuck payments as Sri Lanka declares economic emergency



Experts believe that the future of bilateral trade and investment may be determined by the extent to which the international community can assist. Exporters in India are concerned about Sri Lanka's economic emergency declared by President Gotabaya Rajapaksa last week to control spiralling food prices and declining foreign reserves, as the island nation's restrictions on imports and foreign currency may exacerbate payment problems they are already facing. While India's exports and imports may be the first to be impacted by the Sri Lankan crisis, experts believe that India's investments in development projects and areas such as petroleum retail, tourism and hotel, manufacturing, real estate, and financial services may also suffer if the situation worsens. “In the last year, we have seen Sri Lanka restrict non-essential imports, such as automobiles, to the point where they are practically non-existent. However, India continues to export the majority of its critical goods. However, the situation has worsened since many Indian exporters who have previously shipped have yet to get paid. The Covid-19 problem, which impacted tourism, one of Sri Lanka's major sources of foreign currency revenues, contributed to the country's economic troubles. Many analysts believe that one of the primary underlying causes of the issue is the country's growing foreign debt crisis. Rajapaksa's prohibition on the use of fertilisers, which he wants to convert agriculture completely organic, may have exacerbated the problem. “The types of borrowings that the Sri Lankan government has taken on, particularly under the influence of China, are difficult to pay, and it becomes more difficult for a government to stay afloat. “Sri Lanka is facing a serious problem, and the impact it will have on its economy and trading partners, such as India, will be determined by how the government resolves the crisis and whether the international community, such as the IMF, intervenes,” said Biswajit Dhar, a professor at Jawaharlal Nehru University. Last year, the country's GDP shrank by 3.6%, while the Sri Lankan rupee dropped by 7.5% versus the US dollar this year. Its foreign reserves plummeted to $2.8 billion at the end of July, down from $7.5 billion in November 2019, when the Rajapaksa administration seized power and implemented foreign exchange controls. “Banks are unwilling to discount Letters of Credit issued by Sri Lankan banks since payments are late. This has caused payment issues for Indian exporters, especially those in the yarn and fabric industries. Not only are payments frozen, but it appears that exports must be halted for the time being due to the uncertainty surrounding future payments,” said Sanjay Jain of the Confederation of Indian Textiles Industry. The value of India's goods trade with Sri Lanka is just $3.6 billion a year, but the fact that India has a trade surplus with the country, received $1.7 billion in FDI from 2005 to 2019, and invested a significant amount in development projects makes India a stakeholder in the country's recovery. India may explore providing Sri Lanka with lines of credit that could be returned later, according to Sahai, but all the benefits and drawbacks would have to be considered first.