Sri Lanka’s Meltdown Puts China’s Strategic Influence in Jeopardy
The decline of the Rajapaksas has adversely hit Chinese fortunes in the Indian Ocean island and sullied its image among other Belt and Road partners.
When President Gotabaya Rajapaksa and his family stormed to power in Colombo in 2019, Beijing had much cause to celebrate. Only years earlier, the new president’s elder brother, Mahinda, had been instrumental in heralding a new era of Chinese influence in his country — hosting an array of dazzling infrastructure projects under Beijing’s flagship Belt and Road Initiative (BRI).
The projects had turned Sri Lanka into a strategic outpost in the Indian Ocean for Beijing. Geography had been especially significant: Sri Lanka gave China access to the waters beyond the Malacca Strait chokepoint between Malaysia and Singapore, through which much of China’s trade heading to Africa and West Asia passes.
But after Mahinda Rajapaksa lost power in 2015, a difficult period of coalition politics ensued, and Beijing lost the privileged access that it had previously enjoyed. When the Rajapaksa brothers finally returned to take the presidency in 2019 and win parliamentary elections with a thumping majority the following year, Beijing hoped that it could ramp up its presence in the Indian Ocean through further cooperation with them.
All that has now changed.
In the last few days, clashes have eruptedon the streets of Colombo, costing lives and forcing Prime Minister Mahinda Rajapaksa to resign and be hastily airlifted out of his residence. The political crisis appears unlikely to be resolved soon, even as Sri Lanka struggles to gain access to funds in order to pay for its imports.
The ongoing meltdown in Colombo has brought about a spectacular change in fortunes for Chinese foreign policy, and it could also have serious implications for Beijing’s presence in the Indian Ocean and for the future potential of its global infrastructure investment plan.
Even before the Rajapaksas came to power in 2019, popular protests had hindered Chinese infrastructure projects in various parts of the country. But in the ongoing economic crisis, those projects have been bandied about by protestors as infamous examples of Sri Lanka’s crippling debt problem. A swanky port in Hambantota — the Rajapaksas’ hometown — cost $1.4 billion in Chinese loans, but it lost $300 million in six years. An airport was built nearby with a $200 million loan from China, but it has been used so sparingly that it was unable to cover even its own electricity bills at one point. A conference center in the same city cost over $15 million, but it has remained largely unused, according to reports.
China’s failed projects are already helping fuel criticism that its infrastructure investment is a “debt trap.” These stories will especially spark concern in many poor countries with income levels far below Sri Lanka’s. If Sri Lanka — a country that has led South Asia on multiple socioeconomic indicators for several years — couldn’t recover profits from such swanky infrastructure, Chinese debt is unlikely to reassure the likes of Nigeria, Kenya or Ethiopia.
But making matters worse has been China’s own response to the crisis. So far, Beijing has been conspicuous in its absence in terms of offering assistance to Colombo. Prior to its default on foreign loans, Sri Lanka had appealed to Beijing to have its loans rescheduled. But China was reluctant to roll over loans under BRI, fearing that it would set a bad precedent for its investment in other parts of the world. Ultimately, Sri Lanka went to the IMF for help.
To some extent, Beijing’s own hands have been tied. A fresh outbreak of COVID-19 in China’s major cities has poked holes in President Xi Jinping’s “zero-COVID” policy. Shanghai has been under strict lockdown rules for weeks, sparking widespread discontent and economic passivity. This April, industrial output across China had fallen by 2.9 percent compared to a year earlier. Retail sales had shrunk by over 11 percent year on year.
But through its absence, China has now yielded strategic space to India. So far, New Delhi has extended over $3 billion in financial assistance to Colombo and deferred repayment of loans worth at least $2 billion. India’s influence during the crisis has been so far-reaching, in fact, that one student protestor in Colombo told Quartz, “If [the Indians] ask the president for the clothes off his back, he has to give them up.”
With the spotlight firmly on Ukraine, Beijing might not currently give much thought to its vanishing foothold in Sri Lanka. But if the crisis persists in Colombo, it could have long-term repercussions for China’s strategic influence in the Indian Ocean and the future of its Belt and Road Initiative.
Moreover, India has promised to provide over USD 3 billion to the debt-ridden island country in loans, credit swaps, and also credit lines since the beginning of the year. India has also expressed its desire to work with the new Sri Lankan government.
Sri Lanka seeks another $500 mn credit from India for fuel imports
Amid the continuing economic crisis in the country, Sri Lanka is in talks with India for another credit line of USD 500 million for fuel imports.
This issue was discussed when Sri Lankan High Commissioner to India Milinda Moragoda met with Indian Finance Minister Nirmala Sitharaman last week, Daily Mirror newspaper reported.
The credit line is in addition to USD 500 million extended previously, the report said.
Sri Lanka is facing its worst economic crisis since gaining independence in 1948. The recession is attributed to foreign exchange shortages caused by a clampdown on tourism during the COVID-19 pandemic.
It left the country unable to buy enough fuel, with people facing an acute scarcity of food and basic necessities, fuel, and gas.
According to the Sri Lankan daily, India offered another USD 1 billion line of credit for essential imports. However, USD 200 million of it has been utilized for fuel imports, the report added.
The island nation has exhausted nearly US 700 million of Indian credit so far for diesel and petrol, Daily Mirror reported.
Sri Lankan Prime Minister Ranil Wickremesinghe on Friday praised India for extending support amid the continuing economic crisis and expressed a desire to further strengthen ties between the two nations.
"I expressed our country's appreciation for the support India has extended during this difficult period. I look forward to further strengthening ties between our nations," the Sri Lankan PM tweeted.
Wickremesinghe's appreciation of India came on the same day when its neighbour donated 25 tons of drugs and other medical supplies valued at close to SLR 260 million.
The medical consignment was donated in response to requests by various organizations and hospitals spread across different parts of the country.
The Indian High Commission said these humanitarian supplies are in continuation of the Indian government's ongoing support to the people of Sri Lanka in multiple forms such as financial assistance, forex support, material supply etc.
"These efforts testify to Prime Minister Narendra Modi's 'Neighbourhood First' policy which places people-to-people engagement at its core," the high commission said in a statement.
Sri Lanka seeks fertilisers from India, deferral of payment of $2.5 billion
New Delhi: Sri Lanka has sought the supply of fertilisers from India and the deferral of a payment of $2.5 billion to the Asian Clearing Union as part of efforts to cope with the island nation’s worst economic crisis in decades, people familiar with the matter said on Wednesday.
At the same time, an amount of $200 million from the $1-billion line of credit provided by India in March has been set aside to fund the purchases of fuel, the people said. This will be in addition to the $500-million line of credit provided by India in February for fuel purchases.
With Sri Lanka switching back to the use of chemical fertilisers, there is a growing need for the commodity amid a global shortage created by the Ukraine crisis. It is in this context that the Sri Lankan side has made the request for the supply of fertilisers, the people said.
The Sri Lankan government banned chemical fertilisers last year as part of a phased transition towards organic agriculture. The sudden nature of the change and the dearth of adequate supplies of organic fertilisers affected agricultural output, especially rice and tea, and the government recently ended the ban on several key crops.
“There is a growing demand for fertilisers since the use of chemical fertilisers was cleared by the Sri Lankan government. The supply of other items under the $1-billion line of credit, including food items such as rice and pulses and medicines, has already started,” one of the people cited above said.
The Sri Lankan side has also asked the Indian side to defer the payment of $2.5 billion to the Asian Clearing Union (ACU), an organisation with its headquarters in Tehran that includes Bangladesh, Bhutan, India, Iran, the Maldives, Myanmar, Nepal, Pakistan, and Sri Lanka.
Earlier this year, India had deferred the payment of $515 million to the ACU at Sri Lanka’s request. It had also provided a currency swap of $400 million under the Saarc facility.
ACU is a payment arrangement whereby member countries settle payments for intra-regional transactions among the participating central banks. The main objective of the union is to facilitate payments among member countries to economise on the use of foreign exchange reserves and transfer costs.
Almost $400 million from the $500-million line of credit for fuel purchases has already been expended, and this led to the move to allocate $200 million from the $1-billion line of credit for additional purchases of diesel and petrol, the people said. These arrangements are being worked out by the Ceylon Petroleum Corporation and the Indian Oil Corporation.
Sri Lanka’s energy crisis, especially the shortage of fuel and cooking gas, is one of the most worrying aspects of the economic crisis. Diesel-fired power plants account for almost a third of the country’s electricity generation. There are also reports of a shortage of cooking gas across the country.
The total financial aid provided by India to Sri Lanka since the beginning of the year is worth almost $2.5 billion. Sri Lanka has sought India’s help in garnering international support for bridge financing as it enters negotiations with the International Monetary Fund (IMF) for a bailout programme.
Last month, Sri Lanka announced a default on its external debt of almost $51 billion pending a bailout from the IMF.
India delivers 3.3 tons of essential medical supplies to Sri Lanka
In line with its "neighbourhood first" policy, India again came forward to help Sri Lanka during its economic crisis as High Commissioner to Colombo, Gopal Baglay on Friday handed a total of 3.3 tons of essential medical supplies to the 1990 Suwaseriya Ambulance Service.
Baglay said that External Affairs Minister S Jaishankar was apprised of the looming shortage of medical supplies faced by the Foundation during his visit to the Suwaseriya Headquarters in Colombo in March 2022.
"Another promise to the people of #SriLanka delivered!!! During his visit in March, EAM @DrSJaishankar was apprised of shortages of medicines faced by @1990SuwaSeriya. High Commissioner handed over 3.3 tons of medical supplies today to help the vital lifeline run smoothly," Indian High Commission in Sri Lanka tweeted.
Responding to the urgent need for medical supplies, the High Commission said that the Indian Naval Ship (INS) Gharial was specially deployed for this purpose.
In addition to Suwaseriya Foundation, medical supplies for General Hospital Hambantota, Teaching Hospital, Peradeniya and Teaching Hospital, Jaffna have also been carried onboard INS Gharial, Daily Mirror reported.
"More than 25 tons of drugs and medical supplies which were donated by the Government and people of India during the last two months are valued at close to SLR 370 million. This is in addition to the economic assistance of around USD 3.5 billion and supply of other humanitarian supplies such as rice, milk powder, kerosene etc," the statement added.
Earlier, on May 27, Acting High Commissioner of India in Sri Lanka Vinod K. Jacob handed over a consignment of over 25 tons of medical supplies to Minister of Health, Keheliya Rambukwella in Colombo.
Taking to Twitter, the High Commission of India in Sri Lanka said that the consignment is valued at close to Rs 260 million.
These humanitarian supplies are in continuation of the Government of India's ongoing support to the people of Sri Lanka in multiple forms such as financial assistance, forex support, material supply and many more. These efforts prove that Prime Minister Narendra Modi's
'Neighborhood First' policy which places people-to-people engagement is still active. These are complemented by the people of India who have also been donating generously to their brothers and sisters in Sri Lanka, according to the Colombo Page.
India is becoming a stronger and more mutually beneficial partner to Sri Lanka. Apart from assistance during the pandemic and fertilizer chaos, India is also donating the basic products for island nations.