11 May 2023
Economic Aid to Sri Lanka

Andrew Mitchell, Minister of State at the Foreign, Commonwealth and Development Office, responds to an Adjournment Debate on the UK’s economic aid to Sri Lanka.

The Minister of State, Foreign, Commonwealth and Development Office (Mr Andrew Mitchell)

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.

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.