Daily Current Affairs 15.04.2022 (IMD forecasts ‘normal’ monsoon, no El Nino, Is Hindi or English beneficial as the link language?, Is the Reserve Bank doing enough to rein in inflation?, Understanding the sovereign debt crisis in Sri Lanka, Russia warns against NATO enlargement)

Daily Current Affairs 15.04.2022 (IMD forecasts ‘normal’ monsoon, no El Nino, Is Hindi or English beneficial as the link language?, Is the Reserve Bank doing enough to rein in inflation?, Understanding the sovereign debt crisis in Sri Lanka, Russia warns against NATO enlargement)


1.  IMD forecasts ‘normal’ monsoon, no El Nino

Met Dept. updates long period average rainfall to 87 cm

The India Meteorological Department (IMD), while forecasting a “normal” southwest monsoon for this year also, revised downwards the definition of what constitutes average rainfall.

At a press briefing on Thursday, the agency said India would get 99% of the long period average (LPA) rainfall — changed from 89 cm to 88 cm in 2018, and in the periodic update in 2022, again revised to 87 cm.

A monsoon is considered “normal” when rainfall falls between 96% and 104% of the LPA.

The IMD does not expect an El Nino, a phenomenon associated with a warming of the Central Pacific and drying up of the rains over northwest India, the coming monsoon. “Currently La Nina conditions are prevailing over equatorial Pacific. The latest forecasts indicates it will continue during the monsoon,” the IMD stated.

Current indications suggest “normal” to “above normal” rainfall in the northern parts of peninsular India, central India and the Himalayan foothills. Many parts of northeast India and southern parts of South India are expected to see a subdued monsoon.

Rainfall pattern

IMD Director-General M. Mohapatra said the definition of the LPA was meant to be updated every decade. The 89-cm average was computed based on a 50-year average from 1951 to 2000; the 88 cm based on average for the period from 1961 to 2010; and the latest is based on the average for the period from 1971 to 2020. Over a century, the average rainfall changes every decade with roughly 30 years of a declining trend followed by 30 years of an upswing, Dr. Mohapatra said. “Currently, India is at the end of a dry epoch and we seem to be entering a wet epoch. The next update will be after a decade,” he said.

El Niño

  •  El Niño is the name given to the occasional development of warm ocean surface waters along the coast of Ecuador and Peru.
  • When this warming occurs the usual upwelling of cold, nutrient rich deep ocean water is significantly reduced.
  • El Niño normally occurs around Christmas and usually lasts for a few weeks to a few months.
  • Sometimes an extremely warm event can develop that lasts for much longer time periods. In the 1990s, strong El Niños developed in 1991 and lasted until 1995, and from fall 1997 to spring 1998.

Normal Conditions

  • In a normal year, a surface low pressure develops in the region of northern Australia and Indonesia and a high pressure system over the coast of Peru. As a result, the trade winds over the Pacific Ocean move strongly from east to west.
  • The easterly flow of the trade winds carries warm surface waters westward, bringing convective storms (thunderstorms) to Indonesia and coastal Australia. Along the coast of Peru, cold bottom cold nutrient rich water wells up to the surface to replace the warm water that is pulled to the west.

Walker circulation (Occurs during Normal Years)

  • The Walker circulation (walker cell) is caused by the pressure gradient force that results from a high pressure system over the eastern Pacific ocean, and a low pressure system over Indonesia.

This cross-section of the Pacific Ocean, along the equator, illustrates the pattern of atmospheric circulation typically found at the equatorial Pacific. Note the position of the thermocline.

  • Thermocline == noun a temperature gradient in a lake or other body of water, separating layers at different temperatures.
  • The Walker cell is indirectly related to upwelling off the coasts of Peru and Ecuador. This brings nutrient-rich cold water to the surface, increasing fishing stocks.

During El Nino year

  • In an El Niño year, air pressure drops over large areas of the central Pacific and along the coast of South America.
  • The normal low pressure system is replaced by a weak high in the western Pacific (the southern oscillation). This change in pressure pattern causes the trade winds to be reduced == Weak Walker Cell. Sometimes Walker Cell might even get reversed.
  • This reduction allows the equatorial counter current (current along doldrums) to accumulate warm ocean water along the coastlines of Peru and Ecuador.
  • This accumulation of warm water causes the thermocline to drop in the eastern part of Pacific Ocean which cuts off the upwelling of cold deep ocean water along the coast of Peru.
  • Climatically, the development of an El Niño brings drought to the western Pacific, rains to the equatorial coast of South America, and convective storms and hurricanes to the central Pacific.


Effects of El Nino

  • The warmer waters had a devastating effect on marine life existing off the coast of Peru and Ecuador.
  • Fish catches off the coast of South America were lower than in the normal year (Because there is no upwelling).
  • Severe droughts occur in Australia, Indonesia, India and southern Africa.
  • Heavy rains in California, Ecuador, and the Gulf of Mexico.


How El Nino impacts monsoon rainfall in India

  • El Nino and Indian monsoon are inversely related.
  • The most prominent droughts in India – six of them – since 1871 have been El Nino droughts, including the recent ones in 2002 and 2009
  • However, not all El Nino years led to a drought in India. For instance, 1997/98 was a strong El Nino year but there was no drought (Because of IOD).
  • On the other hand, a moderate El Nino in 2002 resulted in one of the worst droughts.
  • El Nino directly impacts India’s agrarian economy as it tends to lower the production of summer crops such as rice, sugarcane, cotton and oilseeds.
  • The ultimate impact is seen in the form of high inflation and low gross domestic product growth as agriculture contributes around 14 per cent to the Indian economy.

El Nino Southern Oscillation [ENSO]

  • The formation of an El Niño [Circulation of Water] is linked with Pacific Ocean circulation pattern known as the southern oscillation [circulation of atmospheric pressure]
  • Southern Oscillation, in oceanography and climatology, is a coherent inter-annual fluctuation of atmospheric pressure over the tropical Indo-Pacific region.
  • El Nino and Southern Oscillation coincide most of the times hence their combination is called ENSO – El Nino Southern Oscillation.


Southern Oscillation Index and Indian Monsoons

  • SO is a see-saw pattern of meteorological changes observed between the Eastern Pacific and Western Pacific.
  • When the pressure was high over equatorial Eastern Pacific, it was low over the equatorial Western Pacific and vice versa.
  • The pattern of low and high pressures gives rise to vertical circulation along the equator with its rising limb over low pressure area and descending limb over high pressure area. This is known as Walker Circulation.
  • The location of low pressure and hence the rising limb over Western Pacific is considered to be conductive to good monsoon rainfall in India.
  • Its shifting eastward from its normal position, such as in El Nino years, reduces monsoon rainfall in India.
  • Due to the close association between an El Nino (E.N.) and the Southern Oscillation SO the two are jointly referred to as an ENSO event.
  • The periodicity of SO is not fixed and its period varies from two to five years.
  • Southern Oscillation Index (SOD) is used to measure the intensity of the Southern Oscillation.
  • This is the difference in pressure between Tahiti in French Polynesia (Central Pacific), representing the Central Pacific Ocean and Port Darwin, in northern Australia representing the Eastern Pacific Ocean.
  • The positive and negative values of the SOI i.e. Tahiti minus the Port Darwin pressure are pointers towards good or bad rainfall in India.


Indian Ocean Dipole effect (Not every El Nino year is same in India)

  • Although ENSO was statistically effective in explaining several past droughts in India, in the recent decades the ENSO-Monsoon relationship seemed to weaken in the Indian subcontinent. For e.g. the 1997, strong ENSO failed to cause drought in India.
  • However, it was later discovered that just like ENSO was an event in the Pacific Ocean, a similar seesaw ocean-atmosphere system in the Indian Ocean was also at play. It was discovered in 1999 and named the Indian Ocean Dipole (IOD).
  • The Indian Ocean Dipole (IOD) is defined by the difference in sea surface temperature between two areas (or poles, hence a dipole) – a western pole in the Arabian Sea (western Indian Ocean) and an eastern pole in the eastern Indian Ocean south of Indonesia.
  • IOD develops in the equatorial region of Indian Ocean from April to May peaking in October.
  • With a positive IOD winds over the Indian Ocean blow from east to west (from Bay of Bengal towards Arabian Sea). This results in the Arabian Sea (western Indian Ocean near African Coast) being much warmer and eastern Indian Ocean around Indonesia becoming colder and dry.
  • In the negative dipole year (negative IOD), reverse happens making Indonesia much warmer and rainier.
  • It was demonstrated that a positive IOD index often negated the effect of ENSO, resulting in increased Monsoon rains in several ENSO years like the 1983, 1994 and 1997.
  • Further, it was shown that the two poles of the IOD – the eastern pole (around Indonesia) and the western pole (off the African coast) were independently and cumulatively affecting the quantity of rains for the Monsoon in the Indian subcontinent.
  • Similar to ENSO, the atmospheric component of the IOD was later discovered and named as Equatorial Indian Ocean Oscillation [EQUINOO][Oscillation of warm water and atmospheric pressure between Bay of Bengal and Arabian Sea].

Impact on IOD on Cyclonogeneis in Northern Indian Ocean

  • Positive IOD (Arabian Sea warmer than Bay of Bengal) results in more cyclones than usual in Arabian Sea.
  • Negative IOD results in stronger than usual cyclonogenesis (Formation of Tropical Cyclones) in Bay of Bengal. Cyclonogenesis in Arabian Sea is suppressed.

The El Niño Modoki

  • El Niño Modoki is a coupled ocean-atmosphere phenomenon in the tropical Pacific.
  • It is different from another coupled phenomenon in the tropical Pacific namely, El Niño.
  • Conventional El Niño is characterized by strong anomalous warming in the eastern equatorial Pacific.
  • Whereas, El Niño Modoki is associated with strong anomalous warming in the central tropical Pacific and cooling in the eastern and western tropical Pacific (see figure below).

El Niño Modoki Impacts

  • The El Niño Modoki phenomenon is characterized by the anomalously warm central equatorial Pacific flanked by anomalously cool regions in both west and east.
  • Such zonal gradients result in anomalous two-cell Walker Circulation over the tropical Pacific, with a wet region in the central Pacific.

La Nina

  • After an El Niño event weather conditions usually return back to normal.
  • However, in some years the trade winds can become extremely strong and an abnormal accumulation of cold water can occur in the central and eastern Pacific. This event is called a La Niña.
  • A strong La Niña occurred in 1988 and scientists believe that it may have been responsible for the summer drought over central North America. During this period, the Atlantic Ocean has seen very active hurricane seasons in 1998 and 1999.
  • One of the hurricanes that developed, named Mitch, was the strongest October hurricane ever to develop in about 100 years of record keeping.

Effects of La Nina

  • Some of the other weather effects of La Niña include
  1. abnormally heavy monsoons in India and Southeast Asia,
  2. cool and wet winter weather in southeastern Africa, wet weather in eastern Australia,
  3. cold winter in western Canada and northwestern United States,
  4. winter drought in the southern United States.

2. Is Hindi or English beneficial as the link language?

Data on migration and development indices show that there is a stronger case for English to be the link language rather than Hindi

Srinivasan Ramani, Vignesh Radhakrishnan & Jasmin Nihalani

Residents of only 12 of the 35 States and Union Territories (UTs) reported Hindi as their first choice of language for communication (Census 2011). But there is a caveat. “Hindi” is an umbrella term encompassing 56 languages (mother tongues) including Bhojpuri, Rajasthani, Hindi and Chhattisgarhi. While 43% of Indians speak “Hindi”, only 26% speak Hindi specifically as their mother tongue.

This begs the question whether Hindi needs to be made the link language. This is in the context of Union Home Minister Amit Shah saying that when citizens of States communicate with each other, they should do so in the “language of India”, with Hindi as an alternative to English. This sparked criticism from the Opposition. Karnataka Pradesh Congress Committee President D.K. Shivakumar said Bengaluru became India’s IT capital because of English.

The argument used for pushing Hindi as an alternative to English, because it is spoken by the majority, cannot be tenable as it is a majoritarian one. Instead, we need to answer a utilitarian question: which language would be beneficial for citizens as they seek better lives — Hindi or English? In other words, would native Hindi speakers benefit by learning English or should Hindi be imposed on the non-Hindi speaking population for their “benefit”?

A comparison of the Human Development Index (HDI) of States and UTs shows that regions with a higher share of English speakers also have higher HDI scores (Chart 1), while States with a higher share of Hindi speakers have relatively low HDI scores (Chart 2). This means there is a positive correlation between a higher standard of living and a higher share of English speakers.

This is also borne out in migration-related numbers. More people from the Hindi-speaking States have been migrating towards the non-Hindi speaking regions in search of better livelihoods. In the 2017 Economic Survey, an analysis of railways passenger data who travelled in unreserved compartments was used as a proxy to measure work-related migration. “This class of travel serves less affluent people who are most likely to travel for work-related reasons,” the report argued. Movements of nine million such passengers between 2011 and 2016 were considered and travel less than 200 km was ignored.

Map 4 shows the heat map of net passenger flows for FY2015-16 at the State level. In States such as Tamil Nadu, Maharashtra, Gujarat, West Bengal, Andhra Pradesh, Karnataka, Punjab and Delhi, there was net in-migration. The number of people who migrated into these States was higher than those who migrated to other States. Uttar Pradesh, Bihar, Jharkhand, Madhya Pradesh, Rajasthan, Uttarakhand, Haryana, Himachal Pradesh and Chhattisgarh recorded higher net out-migration.

Juxtaposing this with Map 3 shows that the States which recorded net out-migration broadly correspond to the States which have a high share of Hindi speakers. In contrast, the States which recorded net in-migration broadly correspond to regions with fewer Hindi speakers. The exceptions were Kerala, Odisha and, to an extent, Maharashtra. Map 3 shows not just those who speak Hindi as a mother tongue, but also those who mentioned it as either a second or third language of preference (Hindi as an all-encompassing term).

An analysis of the 2011 Census data (Table 5) also shows that net in-migration for Hindi States, where Hindi is spoken by at least 50% of the population, is negative. This indicates that the migrant outflow was higher than the inflow in these States. In non-Hindi States, the net in-migration was positive. This pattern was observed for all types of migrations including those done for work and education.

To summarise, relatively more people from Hindi-speaking States migrate to non-Hindi States, and there is a strong correlation between a region’s HDI and a higher share of English speakers. This suggests a stronger case for English to be the link language rather than Hindi, contrary to what the Union government seems to imply.

1963 official languages Act 

  • Removed the restriction which had been placed by the constitution on the use of English after 1965
  • Because of ambiguity in Official Languages Act due to the world “may” instead of “shall”, it felt much criticism

1967 amendment to official languages Act 

  • Provided the use of English as an associate language in addition to Hindi for the official work at centre & for communication between the centre and non Hindi states would continue as long as non-Hindi states wanted it.
  • Indefinite policy of bilingualism was adopted.
  • The states were to adopt a three language formula that is study of a modern Indian language, preferably one of the Southern languages, apart from Hindi and English in the Hindi speaking areas and of Hindi along with the regional languages and English in the non-Hindi speaking areas.

Parliament adopted a policy resolution lying down that the public service exams were to be conducted in Hindi and English & in all regional languages with the provision that candidates should have additional knowledge of Hindi or English.

3. Is the Reserve Bank doing enough to rein in inflation?

Nurturing the real economy, not just tweaking the repo rate, is the need of the hour

India’s inflation, which is measured by the Consumer Price Index (CPI), has stayed above the Reserve Bank of India (RBI)’s upper tolerance limit of 6% for three months running. The central bank’s monetary policy committee decided to hold benchmark interest rates earlier this month, choosing to remain accommodative “while focussing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”. Western economies such as the U.S. have begun raising interest rates. Is the RBI doing enough to arrest inflation? Ananth Narayan and Lekha S. Chakraborty discuss the question in a conversation moderated by K. Bharat Kumar. Excerpts:

Is the RBI behind the curve in reining in inflation?

Lekha Chakraborty: There needs to be a fundamental rethink on the efficacy of the inflation targeting framework itself. The crucial question is: are we able to anchor inflationary expectations properly? The sole mandate of the RBI is to look into price stability. So, now, what do we do? Do we revise the nominal anchor from the stated 4%? Or do we play around with that band plus or minus 2 percentage points? Or are we going to throw away this framework and adopt a prior inflation targeting framework?

Having said that, the context is important. Inflation is mounting. There is geopolitical uncertainty. The war in Ukraine led to supply-chain disruptions. Consignments are getting delayed. So, it’s a supply-side shock. Manoeuvring with repo rate adjustments to contain inflation may not work. The reverse repo rate itself is likely getting redundant, because the RBI has introduced a new tool — the standing deposit facility rate at 3.75% — to absorb excess liquidity. That’s a smart move, to work with the monetary policy corridor but leaving the rates untouched.

Ananth Narayan: I have a fundamental problem with the monetary policy framework. Monetary policy is extremely complex. All the macro variables that we care about — inflation, growth, jobs, external balance, financial stability — are interrelated; you cannot target one without touching the other. And each of these is impacted by multiple policy tools, such as interest rates (long term, short term, and everything in between), banking liquidity, fiscal balance, exchange rates, macroprudential regulations, RBI interventions and, of course, that lovely thing called sentiment. What we currently have is a simplistic monetary framework, where we pretend that CPI inflation can be controlled by the repo rate almost linearly. To just change the repo rate and expect to keep CPI inflation between 2% and 6% at all times… that is utter rubbish. We can’t legislate away economic complexity.

Now, is RBI behind the curve? There are areas where it feels like the RBI was behind the curve. One, in the February policy, the RBI said it expected FY23 CPI inflation to be 4.5%. That didn’t seem credible. It has revised the estimate to 5.7%.

Two, for long the RBI insisted that the 10-year government bond yield was a public good that had to be kept low. In FY21, both the central and State governments had a record borrowing programme. The FY21 weighted average government borrowing rate was a record low of just 5.8%, because the RBI effectively sat down on the curve. So, the returns for savers was brought down dramatically.

Our household inflation expectations are at 11%. Average deposit rates across all banks are at just 5%. With such hugely negative real rates, we’re pushing savers to the brink, into equity markets, into Bitcoin, and into gold. The resultant asset price inflation is also increasing inequality — the top 15% are doing very well and consuming luxury products, even as the bottom 40% are struggling.

But to be fair to the RBI, it’s not been an easy time. And to give credit, the RBI stopped its government bond purchases in October. It is only now that the U.S. Federal Reserve has stopped buying bonds. Likewise, our money market rates have already gone up quite a bit. One year ago, the one-year Treasury Bill rate was 3.7%. Today it is 4.9%. So, the RBI has allowed rates to come up. I don’t think repo rate could have helped in the current context.

Would you worry about GDP growth?

LC: The inflationary expectations and the output gap are unobserved variables. How do you deal with these variables within the rules-based monetary macro framework?

The output gap variable itself is controversial, because the basic assumption here is that you are experiencing cyclicity; and that once you correct the cyclycity through monetary policy, you’re going to get growth back to pre-crisis levels. This is dangerous, because if that drop in GDP is not cyclical, but a permanent scar, then monetary policy acting as a counter-cyclical policy tool will not work.

That’s why fiscal dominance is very crucial. Fiscal policy has been very accommodative. We have very high fiscal deficit and high debt numbers. But from a position of strength, the Finance Minister articulated that her high fiscal deficit can be substantiated through enhancing investment — through ‘crowding in’ private corporate investment.

AN: The context is very tough. Let’s agree for now that the RBI’s basic mandate is inflation targeting. Now, inflation is a problem. Even for the current fiscal year, FY23, inflation could well cross 6% if oil prices remain where they are. It’s not just oil prices, but also edible oil prices, fertilizers, chemicals, feedstock, and all-round supply chain disruptions.

Now let’s look at growth. The real GDP for FY22 is pretty much the same as it was two years ago before the pandemic. Effectively, two years have gone by with zero real growth. In the last two years, inflation has been 6% compounded annual; high inflation and zero growth are a disaster. The RBI’s growth estimate of 7.2% for the current fiscal is also at risk. High oil and commodity prices tend to reduce our growth. Exports might be impacted because of a global slowdown.

It is also a terrible situation with jobs. CMIE data suggest that over the last five years, we’ve lost two crore jobs outside agriculture. Even before the pandemic, we were losing jobs. Our fiscal situation is already stretched, our external situation is going to get tricky going forward, we are looking at a current account deficit possibly of $100 billion, it could be a record the next fiscal year because of elevated oil prices. FII flows look very iffy, given the global context. Even if FDI flows come in, we’re still going to see a very large outflow from the RBI which has to be made up. Of course, robust tax collections thanks to formalisation and record currency reserves offer us some buffer for now.

It’s a nightmarish situation for policymakers. Under such circumstances, what can they do to control inflation? Normally, pushing up repo rates and tightening liquidity makes sense when there’s a lot of credit growth. If we have 25-30% credit growth, which is creating aggregate demand and money supply, we have to arrest that by increasing the cost of money. For the last two years, however, we have had credit growth of just 7.5% annualised, which is lower than the nominal GDP growth rate. It is difficult to argue that credit growth is causing inflation. If anything, we need more credit in investments and job creation.

Market sentiment is a key factor. Most central banks are tightening monetary policy globally. If we stand out and say we’re not going to tighten, it does attract negative sentiment. We’ve got to give the credibility that we are focussing on inflation. Now the RBI has tried to bring back credibility, by reiterating its focus on inflation, which is great. Improving the return for long-term savers — by not repressing government bond yields — will go a long way in reducing inequality, controlling inflation, and managing financial stability.

The ultimate way to control inflation for India is for us to create jobs and output. The real economy is the only way to improve all our macro variables. Monetary policy cannot do much for either growth, jobs, or for inflation control. Eventually, it’s the real economy, which is where the government comes into the picture.

Is the CPI index appropriately represented? How relevant is the composition now?

LC: The real issue here is the divergence between the WPI and CPI and of course, the energy price volatility and food inflation. So, how the RBI is able to anchor these is key. In India, inflation is not strictly a monetary phenomenon. There are many supply-side shocks. So, can inflation targeting control or manoeuvre those supply side shocks through the ‘expectations channel’ is an important question. Credit infusion — the predominant narrative of economic stimulus packages — is not working very well, because if there is no corresponding growth in the economy, then this credit infusion can lead to mounting NPAs.

On the fiscal policy side, the government has to act as an employer of last resort through ‘participation income’ (not ‘basic income’) in the hands of people, by providing guaranteed jobs. This can be a very strong policy to tackle inflation rather than the government providing cash transfers, a huge fiscal stimulus, into the hands of people.

But at the same time, where is the fiscal space? A crucial question is whether we can do a fiscal-monetary policy coordination through the monetisation of deficit once again, because that’s exactly what Kaushik Basu and Nobel Laureate Abhijit Banerjee have highlighted; they are all arguing for the re-emergence of monetisation of deficit through better coordination of fiscal and monetary policy. So, we need to wait and see because that is again inflationary in nature. But heterodox economists always say that when you are below the full employment equilibrium, it will not lead to mounting inflation, but will lead to growth. My hunch is it’s not the CPI per se (or the core inflation or the headline inflation) that we need to focus on, on the RBI side; the question is a little bigger than that, and that’s about ‘employment’.

AN: The way in which the CPI basket is constructed, as I understand it, is you look at the Consumer Expenditure Survey, and you look at what people are consuming, and then you try and create a rural and an urban basket, which approximates to the average consumer as to what they actually consume; you try and arrive at the median. Now, the last consumer survey was done in 2011-12. There was one done in 2017-18, the results of which remain a mystery to us. There is one report that I saw in Ideas for India. Given that there’s no Consumer Expenditure Survey, they looked at the consumption pattern indicated by the Consumer Pyramids Household Survey (CPHS) of the CMIE. Their conclusion was based on the 2019 pre-pandemic consumer CPHS data; that the basket wasn’t off the mark. Of course, individual items like typewriters need to be corrected in the next Consumer Expenditure Survey, which hopefully will happen in 2022-23.

But the reality also is that people’s perception of inflation is far higher than what the CPI number indicates. It reflects in the household expectations survey that the RBI itself conducts. That’s not a very robust survey so that has its own limitations. But when I speak to folks in the industry, when I speak to even MSMEs, their perception of inflation seems far, far higher than 6%. I think that recent hikes in petrol prices and diesel prices will also add to that expectation.

4. Understanding the sovereign debt crisis in Sri Lanka

Why do governments default on their debt payments? How is the island nation planning to rejuvenate its foreign reserves?

Sovereign debt refers to the debt issued or accumulated by any government. Governments usually find it easier to borrow and repay in their local currency as they can easily create fresh local currency.

But debt denominated in foreign currency, say the U.S dollar, is difficult to repay as one depends on consistent flow of U.S. dollars into the economy.

Sri Lanka depends heavily on its tourism sector to bring in the necessary foreign exchange. Since the pandemic, Sri Lanka’s tourism sector has been hit hard. This, in turn, has affected the inflow of U.S. dollars into the Sri Lankan economy.

The story so far: The Sri Lankan government on Tuesday decided to default on all its foreign debt worth $51 billion as it awaits financial assistance from the International Monetary Fund (IMF). The government stated that it took the decision to preserve its dwindling foreign reserves to pay for the import of essential items. Ratings agencies such as Fitch, and Standard & Poor’s have downgraded Sri Lanka’s sovereign debt.

What is sovereign debt?

Sovereign debt refers to the debt issued or accumulated by any government. Governments borrow money to finance the various expenses that they cannot meet through their regular tax revenues. They usually need to pay interest on such debt along with the principal amount over time although many governments simply choose to borrow fresh debt to repay existing debt. Historically, governments have tended to borrow more money than they could actually repay in order to fund populist spending.

It should also be noted that governments can borrow either in their local currency or in foreign currency like the U.S. dollar. Governments usually find it easier to borrow and repay in their local currency. This is because governments with the help of their central banks can easily create fresh local currency to repay debt denominated in the local currency. This is known as debt monetisation and it can lead to increased money supply which in turn causes prices to rise. Making good on their foreign debt which is denominated in a foreign currency, however, can be a tricky affair for governments. This is because governments depend on the inflow of foreign currency to gather the necessary foreign exchange to pay their foreign debt. The Sri Lankan government or the central bank, for example, cannot create U.S. dollars out of thin air to pay their foreign debt denominated in U.S. dollars. Instead, they depend on U.S. dollars flowing into Sri Lanka in the form of foreign investment and payments received in exchange for the export of various goods and services to build up their foreign reserves.

Why is Sri Lanka unable to make good on its foreign debt commitments?

Sri Lanka depends heavily on its tourism sector to bring in the foreign exchange necessary to import essential items such as food and fuel. The tourism sector contributes to about 10% of Sri Lanka’s gross domestic product. Since the coronavirus pandemic and the ensuing lockdowns, Sri Lanka’s tourism sector has been hit hard. This, in turn, has affected the inflow of U.S. dollars into the Sri Lankan economy. Sri Lanka’s forex reserves have dropped to $2.3 billion in February this year from over $7.5 billion in 2019. Thus, the Sri Lankan government has been finding it hard to obtain the U.S. dollars necessary to make good on its foreign debt obligations. It has thus sought help from the IMF as well as countries such as India and China. India this week agreed to offer additional financial assistance of $2 billion to Sri Lanka by rolling over debt that the island nation owes India.

Sri Lanka’s efforts to fix the exchange rate of the Sri Lankan rupee against the U.S. dollar in order to prop up the price of the rupee may have also played a role in the foreign debt crisis. As foreign exchange inflows dried up during the pandemic and the Sri Lankan rupee came under increasing pressure, the country’s central bank at a certain point banned the payment of more than 200 Sri Lankan rupees for one U.S. dollar. This rate was way below the actual market price of the dollar, which caused trades to be pushed into the black market and also caused a drop in the supply of U.S. dollars in the forex market.

What is the cost of defaulting on foreign debt?

International lenders may be reluctant to lend any more money to the Sri Lankan government unless such lending is part of a restructuring agreement. This fact will also be reflected in the ratings that international ratings agencies give to debt issued by the Sri Lankan government. Going forward, the cost of fresh borrowing is likely to be high for the Sri Lankan government as lenders will be incurring greater risk while lending to a government that has been unable to make good on its previous commitments.

A bailout by the IMF could be on the cards, but the Sri Lankan government will have to agree to implement structural reforms as a pre-condition for such aid. The IMF may require the Sri Lankan government to end its aggressive push towards 100% organic farming that has caused food supplies to be affected and food prices to rise. It may also recommend getting rid of price controls on food and other essential goods. It should be noted that price controls on any commodity affect the incentive that producers have to bring fresh supplies into the market. Controls imposed on the exchange rate of the rupee may also need to go in order to re-attract U.S. dollars. An end to price controls and the ban on non-organic farming can help the domestic economy return to normalcy. This, in turn, can help in the return of tourists. At the moment, mass protests due to rapidly rising prices may be causing many tourists to avoid visiting Sri Lanka, thus worsening the country’s foreign debt crisis.

5. Russia warns against NATO enlargement

Medvedev says Moscow will deploy nuclear weapons if Finland and Sweden join the U.S.-led alliance

One of Russian President Vladimir Putin’s closest allies warned NATO on Thursday that if Sweden and Finland joined the U.S.-led military alliance then Russia would have to bolster its defences in the region, including by deploying nuclear weapons.

Finland, which shares a 1,300-km border with Russia, and Sweden are considering joining the NATO alliance. Finland will make a decision in the next few weeks, Prime Minister Sanna Marin said on Wednesday.

Dmitry Medvedev, Deputy Chairman of Russia’s Security Council, said that should Sweden and Finland join NATO then Russia would have to strengthen its land, naval and Air Forces in the Baltic Sea.

Mr. Medvedev also explicitly raised the nuclear threat by saying that there could be no more talk of a “nuclear free” Baltic — where Russia has its Kaliningrad exclave sandwiched between Poland and Lithuania.

“There can be no more talk of any nuclear-free status for the Baltic — the balance must be restored,” said Mr. Medvedev, who was President from 2008 to 2012.

“Until today, Russia has not taken such measures and was not going to,” Mr. Medvedev said. “If our hand is forced well… take note it wasn’t us who proposed this,” he added.

Lithuania said Russia’s threats were nothing new and that Moscow had deployed nuclear weapons to Kaliningrad long before the war in Ukraine.

The possible accession of Finland and Sweden into NATO — founded in 1949 to provide collective Western security against the Soviet Union — would be one of the biggest strategic consequences of the Ukraine war.

Finland gained independence from Russia in 1917 and fought two wars against it during Second World War during which it lost some territory to Moscow. On Thursday, Finland announced a military exercise in Western Finland with the participation of forces from Britain, the United States, Latvia and Estonia.

Sweden has not fought a war for 200 years and post-war foreign policy has focused on supporting democracy internationally, multilateral dialogue and nuclear disarmament.

Kaliningrad is of particular importance in the northern European theatre. Formerly the Prussian port of Koenigsberg, capital of East Prussia, it lies less than 1,400 km from London and Paris and 500 km from Berlin.


  • North Atlantic Treaty Organization (NATO) is a military alliance established by the North Atlantic Treaty (also called the Washington Treaty) of April, 1949, by the United States, Canada, and several Western European nations to provide collective security against the Soviet Union.
  • There are currently 30 member states.

    • Its original members were Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, the United Kingdom, and the United States.
    • Joining the original signatories were Greece and Turkey (1952), West Germany (1955, from 1990 as Germany), Spain (1982), the Czech RepublicHungary, and Poland (1999), Bulgaria, EstoniaLatvia, Lithuania, Romania, Slovakia, and Slovenia (2004), Albania and Croatia (2009), Montenegro (2017), and North Macedonia (2020).
    • France withdrew from the integrated military command of NATO in 1966 but remained a member of the organization, it resumed its position in NATO’s military command in 2009.
  • Headquarters: Brussels, Belgium.
  • Headquarters of Allied Command Operations: Mons, Belgium.

What are the Objectives of NATO?

  • NATO’s essential and enduring purpose is to safeguard the freedom and security of all its members by political and military means.

    • Political objectives: NATO promotes democratic values and enables members to consult and cooperate on defense and security-related issues to solve problems, build trust and, in the long run, prevent conflict.
    • Military Objectives: NATO is committed to the peaceful resolution of disputes. If diplomatic efforts fail, it has the military power to undertake crisis-management operations.

      • These are carried out under the collective defence clause of NATO’s founding treaty – Article 5 of the Washington Treaty or under a United Nations mandate, alone or in cooperation with other countries and international organisations.
      • NATO has only once invoked Article 5, on September 12, 2001 following the 9/11 attacks on the World Trade Center in the US.

How does NATO Function?

  • NATO has an integrated military command structure but very few forces or assets are exclusively its own.

    • Most forces remain under full national command and control until member countries agree to undertake NATO-related tasks.
  • All 30 allies have an equal say, the Alliance’s decisions must be unanimous and consensual, and its members must respect the basic values that underpin the Alliance, namely democracy, individual liberty and the rule of law.
  • NATO’s protection does not extend to members’ civil wars or internal coups.
  • NATO is funded by its members. The U.S. contributes roughly three-fourths of NATO’s budget.

Why did NATO Originate?

  • After World War II in 1945, western Europe was economically exhausted and militarily weak (the western Allies had rapidly and drastically reduced their armies at the end of the war).
  • In 1948 the United States launched the Marshall Plan, which infused massive amounts of economic aid to the countries of western and southern Europe on the condition that they cooperate with each other and engage in joint planning to hasten their mutual recovery.

    • As for military recovery, under the Brussels Treaty of 1948, the United Kingdom, France, and the Low Countries—Belgium, the Netherlands, and Luxembourg—concluded a collective-defense agreement called the Western European Union.

      • It was soon recognized, however, that a more formidable alliance would be required to provide an adequate military counterweight to the Soviets.
      • In March 1948, following a virtual communist coup d’état in Czechoslovakia in February, the three governments began discussions on a multilateral collective-defense scheme that would enhance Western security and promote democratic values.
      • These discussions were eventually joined by France, the Low Countries, and Norway and in April 1949 resulted in the North Atlantic Treaty.
  • At the end of World War 2, the deteriorating relations between the United States and the USSR eventually led to the Cold War.

    • The USSR sought to expand its influence in Europe through the spread of communism, while the US saw the ideology of the USSR as a threat to its way of life.
  • In 1955, when the Cold War was gaining momentum, the Soviet Union signed up socialist republics of Central and Eastern Europe to the Warsaw Pact (1955). The Pact, essentially a political-military alliance, was viewed as a direct strategic counterweight to NATO.

    • It included Albania (which withdrew in 1968), Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Romania.
    • The Pact was officially disbanded in early 1991 after the dissolution of the Soviet Union itself.

What are the Alliances of NATO?

  • NATO participates in three alliances that expand its influence beyond its 30 member countries.

    • Euro-Atlantic Partnership Council (EAPC): It is a 50-nation multilateral forum for dialogue and consultation on political and security-related issues among Allies and partner countries.

      • It provides the overall political framework for NATO’s cooperation with partner countries in the Euro-Atlantic area, and for the bilateral relationships developed between NATO and individual partner countries under the Partnership for Peace (PfP) programme.

        • The Partnership for Peace (PfP) is a programme of practical bilateral cooperation between individual Euro-Atlantic partner countries and NATO.
        • It allows partners to build up an individual relationship with NATO, choosing their own priorities for cooperation.
      • Established in 1997, the EAPC succeeded the North Atlantic Cooperation Council (NACC), which was set up in 1991 just after the end of the Cold War.
    • Mediterranean Dialogue: It is a partnership forum that aims to contribute to security and stability in NATO’s Mediterranean and North African neighbourhood, and promote good relations and understanding among participating countries and NATO Allies.

      • Currently, the following non-NATO countries take part in the Dialogue: Algeria, Egypt, Israel, Jordan, Mauritania, Morocco and Tunisia.
    • Istanbul Cooperation Initiative (ICI): It is a partnership forum that aims to contribute to long-term global and regional security by offering non-NATO countries in the broader Middle East region the opportunity to cooperate with NATO.

      • Bahrain, Kuwait, Qatar and the United Arab Emirates currently participate in the Initiative.

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