Cash strapped Pakistan has suffered a loss of face in Colombo with its unpreparedness to honour an old commitment. And thereby crashed its own plans of forging close ties with Sri Lanka once again to signal a message to New Delhi in the post – Sirisena days. This is also a huge setback to Pakistan military, and it’s ISI, which has been eyeing a comeback in Sri Lankan theatre.
India’s central bank has stepped into the void with a bilateral currency agreement to provide US$ 400 million to meet Sri Lanka’s short-term international liquidity requirements. This is double the size of the credit Pakistan had been promising for long years.
“Sri Lanka seeks to enter into an agreement with the Reserve Bank of India (RBI) for a Bilateral Currency Swap Arrangement worth US$ 400 million”, said Information and Communication Minister Dr Bandula Gunawardena, who is also the Co-Cabinet spokesman.
Gunawardena was short on details of the deal when he met the media after a cabinet meeting in Colombo. He merely stated that the Cabinet approved the proposal made by Prime Minister Mahinda Rajapaksa, who is also the Finance Minister.
The minister did not disclose as to when the agreement with the RBI would be signed or whether the contours of the deal have been settled.
FITCH WARNING
Indications are that the agreement would be inked over the next few days since Sri Lanka is disparate about shoring up its forex reserves in the wake of corona pandemic. Sri Lankan economy particularly its mainstay tourism suffered badly with tourist cancellations. For the Lanka government, control of the corona pandemic, and distribution of goods and relief to the people are priority number one.
Significantly, the Gunawardena announcement of $400 million financial facility from India came in the wake of ‘red flag’ hoisted by rating agency, Fitch. On Wednesday, the global rating agency asked Sri Lanka to take urgent steps to avert monetary instability. Colombo must inject large volumes of cash below the ceiling policy rate to stop monetary instability, it warned.
Till a few days back, the RBI was not in the picture since Colombo was in talks with Islamabad, amidst expectations that Prime Minister Imran Khan would be more than ready to honour a pledge his country had made almost eight years ago. Heightened diplomatic contacts between the two countries after Gotabhaya Rajapaksa took over as President of the island nation gave rise to optimism that Islamabad would deliver on its promise to be leg up on its traditional nuclear rival.
SIRISENA – SORE POINT
Sri Lanka –Pakistan relations were not in the pink of health during President Maithripala Sirisena’s rule between January 2015 and November 2019. The Sirisena regime’s campaign against narcotic smuggling and its drive against the Islamists became a sore point. The plan to revive capital punishment after a couple of Pakistani narcotic smugglers were caught did not endear Sirisena to Pakistan.
His exit after a lacklustre innings however, revived hopes of a turnaround in the bilateral relations; Pakistan enjoyed tremendous goodwill during the MR presidency. Many top functionaries of Pakistan including the foreign minister Shah Mahmood Qureshi and military bigwigs visited Colombo in recent months to give a new momentum to the ties which were nurtured right from the days of Srimavo Bandaranaike.
MR BRINGS HOPE
Hope took wings when Mahinda Rajapaksa joined his younger brother, President Gotabaya, as Prime Minister. Rajapaksa brothers had tapped Pakistani military help for weapons and ammunition during the Eelam War, particularly the final onslaught on Prabhakaran’s citadel. MR, who holds the keys of the country’s treasury as finance minister, reportedly sounded Pakistan about the $ 200 million loan that was promised in 2012 as a Credit Line Facility. He pointed out that Sri Lanka had approved the draft loan agreement way back in May 2017.
Pakistan has not done so as yet.
President Srisena could have pursued the Pak offer; he did not. But the Rajapaksas did as the island nation’s financial condition has deteriorated under the impact of corona virus.
LANKA EXPECTATION
Sri Lanka Finance Ministry knocked at the Pakistan High Commission in Colombo with a request to expedite the loan deal. The Pak Mission was asked to provide Draft Loan Agreement (DLA) for the US$ 200 million Credit Line Facility. And Colombo began pursuing Pakistan for finalising the agreement at an early date in various bilateral meetings.
Sri Lanka has already earmarked some major projects in housing, livestock and science & technology sectors to utilise the Pakistan loan. The identification of projects was a signal that the Rajapaksa brothers were hopeful of Pakistan honouring its commitment, notwithstanding its inordinate delay in seriously pursuing the DLA.
PAKISTAN IN A FIX
Colombo’s pressure has put Pakistan in a fix over its commitment on credit. By prolonging the process of DLA finalisation through protracted negotiations over terms and projects, it has raised doubts over its intentions and capability. And earned avoidable diplomatic bad blood. In spite of many visits by Pakistani business delegations for new business deals, Si Lanka has begun to play hard ball in according necessary approvals.
On its part, Islamabad is not a rosy position financially. Pakistan is already on a bail out from IMF/World Bank and is finding it difficult to honour its own commitments to the Bretton Woods twins, and the Paris based watch dog, Financial Action Task Force (FATF).
PAK EYING DEBT RELIEF
Moreover Prime Minister Imran Khan has mounted a diplomatic campaign to secure debt rescheduling if not a total waiver from bilateral donors and multilateral agencies citing the financial crunch created by corona pandemic sweeping his country. In 2018-19, Pakistan’s total outstanding foreign debts stood at whopping US$ 106 bn and about US$ 20 bn was paid towards debt and liabilities servicing.
Ties with Sri Lanka are a matter of high priority for successive regimes in Pakistan. The two countries enjoy strong economic and social ties. Pakistan is Lanka’s second-largest trading partner. Iman Khan Government could have walked the extra mile for old times’ sake. It failed to do so.
DIPLOMATIC HAEMORRHAGE
And by not honouring its 2012 commitment, Islamabad suffered a diplomatic haemorrhage though the new government in Sri Lanka was reportedly interested in expediting the DLA to further improve economic engagement with Pakistan.
On its part, Sri Lanka could have factored in the dire straits of Pakistan economy; more so since it became doubtful whether Pakistan can really provide any assistance even in the immediate future, especially because of its own payment liabilities and debts.
INDIA ENTERS
When Sri Lanka turned to Indian apex bank for help is not immediately clear. Last month, during a video conference Prime Minister Narendra Modi held with SAARC leaders on combating corona, Sri Lankan President Gotabaya Rajapaksa dropped broad hints about the island’s economic distress. “Our economy has taken a severe blow due to the coronavirus, particularly in tourism… Our exports are also adversely affected,” he said. It is possible that talks with RBI opened shortly thereafter.
This self-inflicted trust deficit is a setback to the Pakistan military as well. Known as the permanent establishment of the country, it has been eyeing a comeback in Sri Lanka. Early February Pakistan Air Force head, Air Chief Marshal Mujahid Anwar Khan met Prime Minister Mahinda Rajapaksa in Colombo ahead of the latter’s India visit and offered assistance for Sri Lankan Air Force.
Pakistan is known to be keen to offer technical training and professional expertise to Sri Lankan Air Force. Its Chinese-built inventory opens the doors for cooperation between the two South Asian countries. Besides the military, the ISI also developed close links with the Sri Lanka during the Eelam War period and thus made Sri Lanka’s India ties hinge on Pakistan policy. The ISI even tried to fish in troubled waters following tensions between Sinhala majority and Muslims, and to recruit for its terrorist proxy organisations. Not with much success.