Sri Lanka’s deepening economic crisis and the subsequent realignment of its foreign policy represent a potentially transformative moment in South Asian geopolitics. The nation’s desperate search for financial stability has triggered a dramatic shift in its allegiances, intensifying existing partnerships while simultaneously creating new vulnerabilities within the “Neighbourhood First” framework championed by India. This realignment, coupled with Colombo’s mounting debt obligations, presents both opportunities and challenges for regional security and economic integration.
The current situation stems from a confluence of factors. Following the 2004 tsunami, Sri Lanka embarked on a rapid modernization program, fueled largely by Chinese investment. This trajectory, combined with unsustainable domestic borrowing and a decline in tourism revenue following the Easter Sunday attacks in 2019, created a fiscal crisis. Defaulting on sovereign debt obligations in April 2022 exposed the fragility of its economic foundations and forced an immediate reassessment of its foreign policy. “Strategic Debt Dependency” is the core issue.
Historically, Sri Lanka's foreign policy has been deeply intertwined with India. The 1974 Accord, granting India naval and air bases in Sri Lanka, established a foundational alliance. However, post-independence, Colombo has consistently pursued a ‘non-aligned’ approach, balancing its relationship with India with that of China, Russia, and Western nations. The recent economic crisis has fundamentally altered this dynamic. “Debt-for-diplomacy” appears to be the predominant strategy.
Over the past six months, Prime Minister Dr. Harini Amarasuriya’s visit to India (October 16-18, 2025) marks a key component of this recalibration. The visit, a first since assuming office, is focused on securing critical financial assistance and consolidating India’s role as Sri Lanka’s primary economic partner. Dr. Amarasuriya is scheduled to meet with Indian political leaders to discuss bilateral issues of mutual interest. Crucially, she will deliver the keynote address at the ‘NDTV World Summit’ organized by NDTV and Chintan Research Foundation in Delhi, signaling a desire to engage with India’s media and policy circles. Furthermore, she will visit the Indian Institute of Technology (IIT) Delhi and NITI Aayog, exploring avenues of collaboration in education and technology. Dr. Amarasuriya’s background as a graduate of Delhi University's Hindu College underscores this engagement. The visit also includes a planned visit to her alma mater. A business event is scheduled to strengthen commercial linkages between the countries.
The “Neighbourhood First” policy, articulated by Prime Minister Narendra Modi, aims to foster closer ties with neighboring nations through economic and security cooperation. However, Sri Lanka’s dependence on India, particularly its vulnerability to Indian economic pressure, presents a complex dynamic. India’s willingness to provide assistance is contingent on Sri Lanka’s debt restructuring and adherence to certain policy conditions, including reforms in areas such as tax administration and public financial management. “Geopolitical Leverage” remains a significant factor in the equation.
Data from the World Bank indicates that Sri Lanka’s external debt increased from $8.9 billion in 2015 to an estimated $85 billion by 2023. This staggering rise highlights the unsustainable nature of Colombo’s economic trajectory. Recent IMF reports estimate that Sri Lanka needs approximately $3.8 billion in loans to stabilize its economy over the next five years. India has pledged a portion of this amount, but the exact figure remains subject to negotiation.
According to Dr. Amit Bhandari, Senior Fellow at Gateway House, “Sri Lanka’s situation underscores the inherent risks associated with excessive borrowing and the importance of sustainable economic development. India’s response is motivated by a genuine desire to support its neighbor, but it must be carefully calibrated to avoid creating further dependencies.” Furthermore, the geopolitical implications of a significantly indebted Sri Lanka are considerable, potentially impacting regional security dynamics.
Short-Term Outlook (Next 6 Months): Colombo is likely to continue seeking financial assistance from India, alongside exploring alternative funding sources, including the Asian Development Bank (ADB) and the World Bank. Negotiations over debt restructuring will likely continue to be protracted and contentious. The primary risk remains the potential for a further economic downturn if funding remains insufficient to meet Sri Lanka’s immediate needs.
Long-Term Outlook (5-10 Years): Over the next decade, Sri Lanka’s economic future hinges on its ability to diversify its economy, attract foreign investment, and manage its debt burden effectively. The success of India’s “Neighbourhood First” policy will depend on Colombo’s willingness to embrace structural reforms and deepen economic integration with the wider regional economy. However, a key challenge will be balancing India’s influence with the growing strategic importance of China in the Indian Ocean region. “Power Vacuum” is a serious risk if Sri Lanka remains unable to achieve economic stability.
“The trajectory of Sri Lanka’s foreign policy will undoubtedly shape the broader dynamics of South Asia,” argues Dr. Shreya Kapoor Meena, a Research Fellow at the Brookings India initiative. “ Colombo’s choices will not only determine its own future but also influence India’s approach to regional security and economic engagement.” A continued, fractured approach will likely exacerbate regional instability.
The situation in Sri Lanka presents a powerful case study in the vulnerabilities inherent in debt-dependent states and the complexities of regional diplomacy. Moving forward, a nuanced understanding of the underlying forces at play – economic, political, and strategic – is crucial for assessing the evolving landscape of South Asian security and international relations. The coming months will be decisive in determining whether Sri Lanka can successfully navigate this challenging period, or whether it will succumb to the inherent risks associated with its current predicament.