I am grateful to have secured this debate on the UK’s economic aid to Sri Lanka. It is a great pleasure to see the Minister in his place.
My constituency is home to many members of the Sri Lankan diaspora, many of whom still have family in the country. Therefore, the economic and political circumstances of Sri Lanka are important to many of them and, indeed, to me. I thank all the constituents who regularly make contact to update me on the situation in the country. I have also been fortunate to be in contact with many sections of the Sri Lankan community and charities across the UK, such as the Sylvia Lanka Foundation, through my chairmanship of the all-party parliamentary group on Sri Lanka.
It goes without saying that the economic situation in Sri Lanka has been dire and remains so. The roots of the problem go beyond the global economic situation created as a result of the covid-19 pandemic and the war in Ukraine. For some years now, Sri Lanka has been undergoing severe macroeconomic stresses. Pre-existing conditions have simply been exacerbated by international circumstances. At points, the economy has been overvalued. Unnecessary populist reforms by the previous Government were mishandled, with significant tax cuts leading to a huge decrease in tax revenues, with an estimated loss at one point of over £1 billion. A severely misjudged ban on the import of chemical fertilisers led to a 30% annual drop in farming yields. Despite a reversal of the ban following protests, the damage was already done. In the throes of an economic crisis, the short-lived ban led to food shortages and heightened inflation.
A particularly important industry affected by the economic crisis has been tourism. Tourism to Sri Lanka once contributed 5% of the country’s GDP, and it saw a peak of over 2.25 million visitors in 2018. However, in 2019 the dreadful Easter bombings claimed more than 250 lives, and tourism struggled as a result. Before the industry had an opportunity to recover covid-19 struck, and visitors have slumped to just over 700,000 this year. Estimates put its contribution to the economy as low as 0.8%. That has impacted hundreds of thousands of jobs. The UK is Sri Lanka’s third largest source of tourists. I hope that UK tourism will increase, allowing a full return and boosting that vital sector.
All that, combined with congestion at ports in Colombo that has led to a lack of essential supplies such as pharmaceuticals and medical equipment, means that the situation in Sri Lanka is extremely worrying. Despite Sri Lanka taking great strides to reduce overall poverty over many years, the World Bank’s latest report in April estimated that the economic situation has led to the worst poverty levels since 2009, with the lower-middle income poverty rate going from 11% in 2019 to 27% today.
Currently, there are few signs of economic recovery. The International Monetary Fund predicts that the Sri Lankan economy will contract by 3.1% this year, on top of an 8.7% decrease in GDP last year. The global response has been mixed. It is the view of many that the Sri Lankan Government should have approached the International Monetary Fund much sooner than it did. In May last year, Sri Lanka defaulted on its debts, failing to pay back £63 million in interest payments. After lengthy negotiations, and hard work by the international community and the Government of Sri Lanka, in March the IMF approved a £2.4 billion fund to restore stability to the Sri Lankan economy and assist in unlocking its growth potential.
I am extremely grateful to my hon. Friend the Member for Hendon (Dr Offord) for securing this debate and for his well-informed and extremely interesting contribution. The Minister for the Indo-Pacific, my right hon. Friend the Member for Berwick-upon-Tweed (Anne-Marie Trevelyan), would have been delighted to take part but is currently travelling on ministerial duties. It is therefore my pleasure to respond on the Government’s behalf. I will try to respond to the points raised by my hon. Friend, but if I omit any, I will of course write to him.
The UK and Sri Lanka have a long shared history, as marked by the 75th anniversary of our diplomatic relations this year. We are bound by strong relationships between our institutions, businesses and, most importantly, our people. Many UK citizens and parliamentarians have close ties to Sri Lanka, and it is a relationship that matters very much to the United Kingdom. It has therefore been troubling to witness Sri Lanka’s economic decline.
The fallout from the 2019 Easter Sunday attacks, to which my hon. Friend referred, the covid pandemic, and the effects of Russia’s invasion of Ukraine have all posed severe challenges to Sri Lanka’s economy. Those events have been compounded by structural weaknesses, including long-term financial mismanagement. Sri Lanka defaulted on its debt obligations last May and entered a severe economic crisis. Inflation peaked at 73%, one third of the population lacked access to affordable, nutritious food, and there were shortages of fuel, medicine and basic necessities. According to a recent assessment by the Central Bank of Sri Lanka, the country faced a multifaceted disaster. While the situation has since improved, many are still struggling, and a large number of Sri Lankans have experienced a profound decline in living standards.
Recognising the deteriorating humanitarian situation, the British Government provided £3 million of targeted support for those most severely affected, as my hon. Friend acknowledged. While it is unusual to provide humanitarian assistance to a lower-middle-income country outside a disaster situation, that reflected the level of economic hardship and urgent need, as well as the very close and friendly relationship between our two countries. Delivered through our UN partners and the Red Cross, our support has provided food for schoolchildren, hygiene kits for girls, and multi-purpose cash grants for poor and vulnerable families to meet essential household needs, including food. That complements UK support provided through multilateral agencies, such as the United Nations Central Emergency Response Fund. The UK is the largest donor to the fund, having contributed more than $1.7 billion since its inception in 2006, and it has already provided $5 million to Sri Lanka.
5:22 pm
House adjourned.
So far, the UK’s initial response has rightly been focused on humanitarian assistance. I am pleased that Lord Ahmad of Wimbledon announced a £3 million package of support at the UN General Assembly in September last year. I know the provision of pharmaceutical and medical supplies has been a great relief to many.
Beyond that, we are fortunate that the UK is already heavily involved in, and a large contributor to, many of the organisations assisting in Sri Lanka, such as the UN Central Emergency Response Fund and the World Bank. As a permanent member of the Paris Club, the UK will be heavily involved in the debt restructuring process. I hope the UK can support an early agreement on bilateral restructuring, which would release resources to revive the Sri Lankan economy. Will the Minister give an update on the UK’s involvement on that front?
It is increasingly vital that the UK uses its global influence in these organisations to assist in securing the best possible economic support for Sri Lanka and to provide debt sustainability. The UK must play a constructive role on the executive board of the International Monetary Fund during the full implementation of the extended fund facility, particularly during the biannual reviews.
Such influence is vital to counter the sway of nations such as China. I, in common with many of my colleagues, am increasingly concerned about the economic influence of China, which is using investment as a means of control. As the country’s biggest bilateral lender, China is owed some $7 billion by Sri Lanka. Many of the projects that were invested in by China have yielded little return for the country. Despite that, investments in major ports, such as Hambantota, have allowed China to have increasing access to trade in the Indian ocean, and a Chinese foreign ministry spokesman has said that the priority for Chinese diplomacy
“lies in China’s neighbouring countries”.
That is the very definition of what has been called debt- trap diplomacy.
I believe that the UK could always do more with regard to economic support, whether directly or indirectly through organisations such as UNICEF. Would the Foreign, Commonwealth and Development Office consider setting up a disaster emergency fund to ease the immediate crisis and assist the World Bank in reinvigorating the Sri Lankan economy?
Indeed, our own economic support to Sri Lanka can go far beyond humanitarian and direct financial support. Free trade is a global force for good and countries such as Sri Lanka thrive on the ability to trade their many goods across the globe. Sri Lanka has signed free trade agreements with countries including India and Singapore and is in the process of negotiating such an agreement with China.
Total UK imports from Sri Lanka increased by about 17% last year, to around £1 billion. While that is a promising sign, there remains an untapped market which would be hugely beneficial to the people of the UK and Sri Lanka. Now that the UK has reforged its way in the world as a global trading nation and is seeking new trading opportunities, I gently suggest that we focus on old friends, particularly those in the Commonwealth.
I am aware that this is not necessarily a matter for the FCDO. However, I would be interested to hear what conversations the Minister may have had, if any, with his counterparts in the Department for Business and Trade about how the UK can operate an aid-for-trade system with Sri Lanka. By using our aid as a mechanism to bolster Sri Lanka’s infrastructure, for example its ports, we can boost trade for the benefit of businesses, but also finance the ability to import essential supplies.
Beyond trade, Sri Lanka has an endless opportunity for the UK to invest. A long-standing and personal interest of mine is the environment and climate change, particularly investment in sustainable energy sources. I know from discussions with the former governor of the Central Bank of Sri Lanka that overall investment in climate-related projects in Sri Lanka is lacking, despite Sri Lanka having ambitious targets for transitioning to a green economy.
As a small island and a developing nation, Sri Lanka is acutely at risk when it comes to climate change and rising sea levels. There is a perfect opportunity for the United Kingdom to invest in something that is in the interest of us all: protecting the planet for future generations. Without the correct financial support, countries such as Sri Lanka will not be able to achieve the sustainable development goals set out in 2015. I know the Minister is passionately concerned about this area.
I am delighted that this Government have made a fantastic start on this. Through the UK’s climate action for a resilient Asia initiative, the FCDO has partnered with the United Nations Development Programme and the Sri Lankan Ministry of Finance to implement the Climate Finance Network. The network will focus on climate change-aligned budgeting and increasing direct access to international climate change finance. Importantly, it will also focus on ensuring peace and reconciliation in the country, which I will touch on in a minute. Will the Minister update the House on the progress of the Climate Finance Network and on what discussions the Department has had with the high commission in Colombo on helping Sri Lanka secure its climate future?
I believe that more can be done in terms of direct investment, particularly in areas such as renewable energy. Some 98% of Sri Lankan households are dependent on an already unreliable national grid. The Ceylon Electricity Board is being unbundled into 14 units, and foreign support is required in the form of capital and technological knowledge.
I would also like to see UK action on maintaining and boosting biodiversity in the country. Sri Lanka’s unique island biodiversity is facing decline through pollution, river diversion, habitat loss, and even man-made natural disasters such as the X-Press Pearl incident in 2021. I know the UK has taken great strides in helping developing countries to meet the 30 by 30 target, but I would be interested to hear what financial assistance the Government are providing to Sri Lanka to help to protect its habitats.
Finally, I wish to touch on the need for continued peace and reconciliation in Sri Lanka. I do not need to lecture the Minister—who knows better than many Members —on the intricacies of Sri Lanka’s political history. However, it goes without saying that Sri Lanka lies in a delicate balance, which the economic and humanitarian situation in the country risks tipping. Food shortages can lead to conflict anywhere they occur in the world, so it is vital that the UK plays its part in assisting the country to achieve food security.
The situation in Sri Lanka is undoubtably complex. A complex financial history has been worsened by populist politics. An economic crisis has spiralled into a political crisis and is quickly creating a humanitarian one. Of course, all this is made even more complex by the remnants of a long-standing conflict still lingering in the country. Economic aid to Sri Lanka should of course focus primarily on alleviating the humanitarian situation out there, such as by providing medical supplies, as I mentioned on earlier. However, we must not doubt Sri Lanka’s ability to stand on its own two feet, and the UK can play a role in helping our friends to achieve that.
The IMF deal is just the beginning of the journey for Sri Lanka. The challenge now is to help implement the IMF deal successfully, to assist Sri Lanka in restructuring its debt, to provide the right economic support to strengthen its national growth, and to ensure a peaceful and prosperous future for the island. The people of the island deserve that, as it is a member of the Commonwealth and has been a friend to us over many years. I leave the Minister with one final point: the UK Government should not, as V. V. Ganeshananthan writes in her new novel “Brotherless Night”, leave in their wake
“peoples divided by colonial powers, ancestral angers, and bullheaded pride.”
Minister, I am sure we can do more.
My hon. Friend asked specifically how we were helping Sri Lanka to tackle its economic situation. The Asian Development Bank and the World Bank are providing emergency assistance under a joint action plan to help to reduce the impact of the economic crisis. The UK is also working with international partners and the Sri Lankan Government to address the causes of the crisis, and to support debt sustainability and economic recovery. We welcome the International Monetary Fund’s recent approval of a four-year programme worth $3,000 million to support Sri Lanka’s economic policies and reforms. That has now begun, with the first tranche of financing disbursed. We will continue to support Sri Lanka’s debt restructuring process, and encourage all creditors to engage constructively in these negotiations.
We recognise Sri Lanka’s commitment to the policy reforms that are required to keep its IMF programme on track, and we look forward to working with its Government on that agenda as well. Our conflict, stability and security fund programme is already supporting parliamentary Committees on the issue of public debt management. We look forward to working with the Sri Lankan Government on their proposed reform agenda, including their ambition to build back greener; that, too, was mentioned by my hon. Friend during his excellent speech.
On 18 April, the UK and Sri Lanka held an inaugural strategic dialogue, in which we discussed how we could further support the country’s economic recovery. We will continue to explore ways in which we can help the Sri Lankan Government to advance their reform agenda. Furthermore, the new developing country trading scheme will enable Sri Lanka to benefit from duty-free exports to the UK in respect of more than 80% of products, and will remove tariffs from more than 150 additional products.
My hon. Friend asked me specifically about China, and I wish to respond to his question in some detail. China is an important source of aid, trade and investment for many developing countries. Chinese investment, including investment under a belt and road initiative badge, can help to fill the global infrastructure gap, alongside other infrastructure initiatives, but we recognise the potential risks that this poses in relation to issues such as debt sustainability and China’s economic and political influence. The nature of Sri Lanka’s debt owed to China is complex and varied, and China’s past reluctance to provide debt treatments is a cause for concern. It holds 13% of Sri Lanka’s external debt stock, a level that is similar to the 12% held by the Paris Club and the 7% held by Japan, and lower than the private market borrowing level of 42%. We welcome the specific and credible financing assurances from Sri Lanka’s major bilateral creditors, including China, to help the country to secure an IMF support package. As I mentioned, that was approved by the IMF’s executive board on 20 March. We recognise the importance of all creditors, including China, engaging constructively in debt restructuring negotiations and policy reform, in Sri Lanka and in many other countries as well.
I turn now to the important issue of human rights. Some hon. Members from across the House have from time to time proposed conditions being placed on IMF assistance to Sri Lanka, but the fund is unable to impose those in relation to politics or human rights. We will closely follow Sri Lanka’s reform agenda to ensure social safety net protections adequately support all communities. We will also support the fund’s requirement for Sri Lanka to implement a comprehensive anti-corruption framework.
The UK, alongside our partners, has led international efforts to promote human rights for all communities in Sri Lanka, including through resolution 51/1 at the UN Human Rights Council. We urge the Sri Lankan Government to engage with key stakeholders, including victim communities, to ensure the success of those initiatives. As penholder on that resolution, we continue to call for progress on human rights, the rule of law and good governance.
We welcome Sri Lanka’s positive engagement in the universal periodic review process. However, we have made clear our concerns over heavy-handed responses to peaceful protests and the importance of upholding the rule of law and safeguarding representative democracy. I can tell the House that the Minister for the Indo-Pacific met Foreign Minister Ali Sabry on 14 March, where they discussed Sri Lanka’s plans for transitional justice mechanisms, along with many other matters.
We continue to be concerned by Sri Lanka’s economic situation for many of the reasons my hon. Friend set out in his eloquent contribution. Throughout this difficult period, the UK has been engaged in helping those who are worst affected. We will continue to work with international partners to promote Sri Lanka’s economic recovery and assist with its reform programme. We will also continue to play a committed role in supporting Sri Lanka towards an inclusive, democratic and a prosperous future.