Sven Hoppe | image alliance via Getty Images Indian Foreign Minister Subrahmanyam Jaishankar was in Sri Lanka this week to offer assistance to Sri Lankan’s troubled economy in an effort to remove it from China’s embrace for decades. 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, increasingly powerful neighbor so closely intertwined with Sri Lanka, it has upset India, which is trapped in a confrontation with China on its disputed border in the Himalayas. Sri Lanka’s economic crisis gives India a chance to move the country away from Beijing’s influence. Perched just off the busy East-West shipping lanes, Sri Lanka has invested billions in China’s Belt and Road Initiative. The project began in 2013 for the construction of ports, roads, railways, pipelines and other infrastructure throughout Asia. However, China has seized at least one strategic port when Sri Lanka has failed to service its debt. New Delhi won a small but significant victory on Tuesday when it withdrew an earlier energy project in China. India is also trying to overtake China in its willingness to provide financial assistance to Sri Lanka, which is in dangerously low foreign exchange reserves to service its debt. Sri Lanka currently has about $ 2 billion in foreign exchange reserves compared to $ 7 billion in total debt maturing this year, including $ 1 billion worth of bonds maturing in July, according to Reuters. China’s presence worries India, really. But India and Sri Lanka are also maritime neighbors. Any instability in Sri Lanka will have a secondary effect on India. Gulbin Sultana collaborator, Manohar Parrikar Institute for Defense Studies and Analyzes During Jaishankar’s trip, Sri Lanka sought a $ 1.5 billion credit line to buy commodities, Reuters reported. That’s more than the $ 2.4 billion India has transferred since January through currency swaps, loan deferrals and credit limits. China, which has deeper pockets, has not yet accepted a request from Sri Lanka for a $ 2.5 billion credit line or restructuring of its total 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 runs out
Food, milk, medicine and other basic products are in short supply as inflation exceeds 17%. Power outages are common and some people have died of heatstroke while waiting in long lines to buy fuel. India is trying to stabilize the region, said Gulbin Sultana, a fellow at the Manohar Parrikar Institute for Defense Studies and Analysis in New Delhi. “China’s presence worries India, really. But India and Sri Lanka are also maritime neighbors. Any instability in Sri Lanka will have a secondary effect on India,” he told CNBC. More than a dozen refugees have arrived in India by boat, and Indian media reported, citing sources, that another 2,000 are expected to follow in the coming days. The nationalist Rajapaksa government of Sri Lanka, which had hoped to overcome the crisis without the help of the IMF, 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 rescue from the IMF 16 times in the last 56 years, second only to Pakistan’s debt. The current crisis has been accelerated by tax cuts that hit government revenues that were already under pressure after the Covid-19 pandemic that plunged the tourism industry into $ 5 billion. In 2020, real GDP shrank by 3.6% and Sri Lanka lost access to international debt markets after its downgrade.
Caught in a “strategic trap”
China has so far not accepted Sri Lanka’s request for debt restructuring. Ganeshan Wignaraja, a non-resident senior fellow at the South Asian Studies Institute 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 in Colombo. “Both will link China to failure because Sri Lanka’s economic model was based on that of China.” The Chinese Foreign Ministry did not immediately send a request to CNBC for comment. Sri Lanka adopted the Chinese infrastructure-driven model of development in the early 2000s on the condition that it would create jobs and lead to prosperity. Reliable data are not available, but the cumulative value of Chinese infrastructure investment in Sri Lanka is estimated at over $ 12 billion between 2006 and 2019. Large-scale Chinese infrastructure loans are one of the immediate issues. none of them could generate expected revenue to repay the loans. Asanga Abeyagoonasekera Senior Partner, Washington-based Millennium Project Aside from the Sri Lankan financial crisis, Colombo is also trapped 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 aspects of human rights, politics and security. China protects Sri Lanka from criticism of its human rights record at the United Nations and favors an authoritarian, heavily militarized model of governance over democracy, he added. “The quantitative economic projection of the debt trap lags behind the strategic depth of Chinese projects. Chinese projects have a long-term strategic plan that could easily bring a ‘hybrid’ model of political-military activity to the country “Sri Lanka and the whole region,” said Abeyagoonasekera. “Large-scale Chinese infrastructure loans are one of the immediate problems; none of them could generate the expected revenue to repay the loans,” he said, calling Chinese loans “opaque.” Both experts believe that IMF assistance will be the key to resolving Sri Lanka’s economic problems. Sri Lanka, Wignaraja suggested, would be better served if India added its “strong voice” for Colombo to implement an IMF program that would require profound economic reforms.
