India tries to free Sri Lanka from China’s embrace

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

Sven Hoppe | images alliance via Getty Images

Indian Foreign Minister Subrahmanyam Jaishankar was in Sri Lanka this week to offer help to Sri Lanka’s struggling economy in an attempt to break it out of the decades-old Chinese embrace.

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

Having a giant and increasingly assertive neighbor so closely intertwined with Sri Lanka has unsettled India, which is locked in a standoff with China over its disputed Himalayan border. Sri Lanka’s economic crisis provides India with an opportunity to steer the country away from Beijing’s troubles. influence.

Located 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, oil pipelines and other infrastructure in Asia.

But China has seized at least one strategic port. when Sri Lanka defaulted on its debt service. New Delhi scored a small but significant victory on Tuesday when it seized a power project previously awarded to China..

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

China’s presence worries India, right? But India and Sri Lanka are also maritime neighbors. Any instability in Sri Lanka will have a knock-on effect in India.

Sultana Gulbin

associate member, Manohar Parrikar Institute for Defense Studies and Analysis

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

China, which has deeper pockets, has yet to agree to a Sri Lankan request for a $2.5 billion credit line or a full debt restructuring. About 22% of Sri Lankan debt it is due to bilateral creditors: China and Japan (10% each), as well as India (2%).

Milk, medicine, gasoline running low

Food, milk, medicines and other basic products are scarce as the inflation rate exceeds 17%. Power outages are common, and some people have died of heat stroke while waiting in long lines to buy fuel.

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

“The presence of China is a matter of concern for India, it is true. But India and Sri Lanka are also maritime neighbors. Any instability in Sri Lanka will have a knock-on effect in India,” he told CNBC.

More than a dozen refugees have arrived in India for The ship and Indian media reported, citing intelligence sources, that an estimated 2,000 more would follow in the coming days.

Sri Lanka’s nationalist Rajapaksa government, which had hoped to overcome the crisis without IMF help, changed course 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 has sought IMF bailouts 16 times in the last 56 years, second only to Pakistan’s debt.

The current crisis was precipitated by tax cuts that affected government revenues that were already under pressure after the The Covid-19 pandemic brought down the $5 billion tourism industry. In 2020, Real GDP contracted 3.6% and Sri Lanka lost access to international debt markets after its ratings were downgraded.

Caught in a ‘strategic trap’

So far, China has not agreed to Sri Lanka’s debt restructuring request. Ganeshan Wignaraja, a non-resident senior fellow at the Institute for 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 two, it will associate China with failure because Sri Lanka’s economic model was based on China’s.”

China’s Foreign Ministry did not immediately respond to a CNBC request for comment.

Sri Lanka adopted China’s infrastructure-led growth model in the early 2000s on the premise that it would create jobs and usher in prosperity. Reliable figures are not 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 were able to generate the expected income to repay the loans.

Asanga Abeyagoonasekera

principal investigator, Washington-based Millennium Project

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 a heavily militarized and authoritarian model of government over democracy, she added.

“The quantitative economic projection of the debt trap falls short in capturing 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 whole region,” Abeyagoonasekera said.

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

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

Sri Lanka, Wignaraja suggested, would best benefit from India adding its “powerful voice” to get Colombo to implement an IMF program that will require deep economic reforms.

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