India tries to extricate Sri Lanka from Chinese embrace

This February 2022 image shows Subrahmanyam Jaishankar, India’s Foreign Minister, speaking on day two of the Munich Security Conference. Jaishankar’s visit to Colombo on Monday comes as Sri Lanka is in the throes of an economic crisis.

Sven Hoppe | photo alliance via Getty Images

Indian Foreign Minister Subrahmanyam Jaishankar was in Sri Lanka this week to offer aid to Sri Lanka’s struggling economy in a bid to steer it away from a decades-long Chinese embrace.

Sri Lanka’s two-year economic crisis comes after two decades of heavy Chinese investment in what one geopolitical expert has called “strategic trap diplomacy”.

Having a giant and increasingly assertive neighbor so closely tied to Sri Lanka has destabilized India, which is locked in a standoff with China on their disputed Himalayan border. Sri Lanka’s economic crisis offers India an opportunity to wean the country from Beijing affecting.

Perched just off the busy East-West shipping lanes, Sri Lanka has attracted billions in investment under China’s Belt and Road Initiative. The program was launched in 2013 to build ports, roads, railways, pipelines and other infrastructure across Asia.

But China took over at least one strategic port when Sri Lanka defaulted on its debt. New Delhi scored a small but significant victory on Tuesday by snatching an energy project previously awarded to China.

India is also trying to outdo China in its willingness to provide financial aid to Sri Lanka, whose foreign exchange reserves are dangerously low to service its debt. According to central bank data obtained by Reuters, Sri Lanka currently has around $2 billion in foreign exchange reserves against $7 billion in total debt due this year, including $1 billion in notes maturing in July.

The presence of China worries India, it is true. But India and Sri Lanka are also maritime neighbours. Any instability in Sri Lanka will have a ripple effect on India.

Gulbin Sultana

Associate Researcher, Manohar Parrikar Institute for Defense Studies and Analysis

During Jaishankar’s journey, Sri Lanka sought a $1.5 billion line of credit to buy essentials, Reuters reported. This is on top of the $2.4 billion that India has transferred since January through currency exchange, loan deferral and lines of credit.

China, which has deeper pockets, has yet to accede to a Sri Lankan request for a $2.5 billion line of credit or a restructuring of its overall debt. About 22% of Sri Lanka’s debt is owed to bilateral creditors — China and Japan (10% each) as well as India (2%).

Milk, medicine, gasoline are running out

Food, milk, medicine and other essentials are lacking while the inflation rate exceeds 17%. Power cuts are commonplace and some people have died of heatstroke while queuing to buy fuel.

India is trying to stabilize the region, said Gulbin Sultana, a research associate at the Manohar Parrikar Institute for Defense Studies and Analysis in New Delhi.

“China’s presence is of concern to India, it is true. But India and Sri Lanka are also maritime neighbours. Any instability in Sri Lanka will have a ripple effect on India,” he said. she told CNBC.

More than a dozen refugees have reached India by boat and Indian media reported, citing intelligence sources, that around 2,000 more would follow in the coming days.

Sri Lanka’s nationalist Rajapaksa government, which had hoped to emerge from the crisis without help from the IMF, backtracked this month. Finance Minister Basil Rajapaksa, who is also the president’s brother, will soon travel to Washington to present policy proposals to the lender.

Sri Lanka asked The IMF has bailed out 16 times over the past 56 years, second only to debt-ridden Pakistan.

The current crisis was precipitated by tax cuts which hit public revenues already under pressure after the The Covid-19 pandemic has knocked down the tourism industry by $5 billion. In 2020, Real GDP contracted by 3.6% and Sri Lanka lost access to international debt markets after its rating was downgraded.

Caught in a “strategic trap”

China has so far not acceded to Sri Lanka’s request for debt restructuring. Ganeshan Wignaraja, a nonresident senior fellow at the Institute of South Asian Studies at the National University of Singapore, attributed China’s reluctance to two factors.

“First, it will set a bad precedent for other nations that have borrowed from China,” he told CNBC from Colombo. “And second, it will equate China with failure because Sri Lanka’s economic model was based on China’s.”

The Chinese Foreign Ministry did not immediately return a request for comment to CNBC.

Sri Lanka adopted China’s infrastructure-led growth model in the early 2000s on the premise that it would generate jobs and usher in prosperity. No reliable figures are available, but the cumulative value of Chinese infrastructure investment in Sri Lanka is estimated at more than $12 billion between 2006 and 2019.

Large-scale Chinese infrastructure loans are one of the direct concerns; none of them was able to generate the expected income to repay the loans.

Asanga Abeyagoonasekera

senior researcher, Millennium Project, based in Washington

Beyond Sri Lanka’s financial crisis, Colombo is also caught in a “strategic trap”, said Asanga Abeyagoonasekera, a Sri Lankan geopolitical analyst and senior fellow at the Washington-based Millennium Project.

He described the strategic trap as an extension of a “debt trap” with human rights, political and security aspects. China shields Sri Lanka from criticism of its human rights record at the United Nations and favors an authoritarian and heavily militarized model of governance over democracy, he added.

“The quantitative economic projection of the debt trap fails to capture the strategic depth of Chinese projects. Chinese projects have a long-term strategic design that could comfortably bring a ‘hybrid model’ of civil-military activity to the country, a security concern for Sri Lanka and the entire region,” said Abeyagoonasekera.

“Large-scale Chinese infrastructure loans are one of the direct concerns; none of them could generate the expected revenue to repay the loans,” he said, calling the Chinese loans “opaque “.

Both experts believe that IMF assistance will be essential to solve Sri Lanka’s economic problems.

Sri Lanka, Wignaraja suggested, will be better served if India adds its “powerful voice” to get Colombo to implement an IMF program that will call for deep economic reforms.

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