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This Article is From Apr 22, 2022

Sri Lanka, Pakistan, Nepal: India's Neighbourhood In Turmoil - 'Hot Mic' With Nidhi Razdan

Hot Mic With Nidhi Razdan: There is a crisis in India's neighbourhood - from the political turmoil in Pakistan to the economic meltdown in Sri Lanka and now Nepal running out of forex reserves.

Hi, This is Hot Mic. And I'm Nidhi Razdan.

So there's a war in Ukraine that's been dominating world headlines but in case you haven't noticed, there is also a crisis in India's neighborhood. From the political turmoil in Pakistan to the economic meltdown in Sri Lanka and now India's northern neighbor, Nepal, is running out of forex reserves. It is relentless. So what exactly is going on in our neighborhood? Well, Sri Lanka first.

For weeks now, the island nation has been engulfed in anti-government protests as it faces its worst ever economic crisis. Very simply, Sri Lanka has run out of foreign exchange that would enable it to buy essential goods, including food, medicines and fuel. Their economy, for years, has been heavily dependent on imports for all these essentials. But the pandemic and a series of bad policy decisions have left Sri Lanka in this precarious situation today.

This week, for the first time, the protests also turned violent and one protester was shot dead by police in the central town of Rambukkana. That led to huge outrage. This is the first time live ammunition was used by the police since the protests started. The demonstrators, led mostly by the youth and students, want President Gotabaya Rajapaksa to resign, but he's refusing to quit. Power cuts in many areas have lasted for more than half a day. People are queuing up for hours to get fuel - if they get it. And medicines have run out in key hospitals while local politicians have warned of a starvation crisis. 

Meanwhile, Pakistan has lurched from one crisis to the next. There was the extended political turmoil caused by a no-confidence motion against Prime Minister Imran Khan. And ultimately, he had to go - kicking and screaming. But Pakistan is now facing an energy crisis. There are major power cuts taking place because the country can no longer afford to buy coal or natural gas from overseas in order to fuel its power plants.

The problem with Pakistan is that it's heavily dependent on imported oil and gas for its power sector. The new Finance Minister, Miftah Ismail, has said that almost 7,100 megawatts of electrical capacity
had been shut down owing to fuel shortages as of the 13th of April. Pakistan is already struggling with its economy. Inflation is at an all-time high of 13%, fuel prices are soaring and the country is also dealing with crippling debt. These were also key factors that drove the opposition to come together against Imran Khan and turn the army's opinion against him as well.

Things are so bad that it was reported this week that prices of petrol and diesel may go up by 83 Pakistani rupees and ₹119 per litre respectively. Their foreign exchange reserves are also at their lowest point since June of 2020.

And now, Nepal. Like Sri Lanka, Nepal's economy is heavily dependent on tourism and imports. And like Sri Lanka, Nepal, is also facing a foreign exchange reserve crisis. Foreign exchange reserves have been declining since July of 2021. Soon after a political crisis in the country led to the fall of the KP Sharma Oli government. Exports declined sharply, while income from tourism was badly hit because of the pandemic.

Foreign exchange reserves fell over 18% to $9.6 billion as of mid-March from mid-July - enough for around six months of imports. The Nepalese government has now appealed to its citizens living abroad to deposit funds in Nepalese banks. These remittances, or money earned by Nepalese citizens abroad and sent back home to their families, are crucial for Nepal's economy.

In Nepal, remittances by overseas workers, which constitute nearly a quarter of the economy, are crucial for external payments. These fell 3% to $5.3 billion between mid-July to mid-March, compared with a 5% increase in the same period a year earlier.

Nepal's Finance Minister, who denies any comparisons with  Sri Lanka, has said that if 100,000 Nepalese nationals living abroad deposit $10,000 each in Nepalese banks, it could go a long way to help the country overcome its current liquidity constraints. Forex reserves, though, at the moment are expected to last only until July of this year.

The country also depends on imports for essentials like fuel and medicines. As the crisis deepened, Nepal's Central Bank also imposed curbs on the imports of luxury goods like cars, gold and cosmetics in order to conserve its forex reserves.

But soon after that, Nepal's government suspended the Central Bank Governor for not doing enough to rescue the economy.

In both Sri Lanka and Nepal, India has an opportunity to step in and help in order to counter China's influence in both these countries. But faced with high inflation and high fuel prices, India, too, is faced with considerable challenges at the moment.

The war in Ukraine has only complicated matters for many of the world's economies.

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