Sri Lanka’s turn to China amid the island nation’s worst economic crisis in decades risks surrendering more long-term sovereignty in exchange for a short-term financial lifeline.
Colombo’s slip into what many critics have characterized as a China “debt trap” could see Beijing deepen its strategic footprint in the Indian Ocean, significantly at a time the region is becoming the focus of a US-China geopolitical tussle.
On a mid-January visit to Sri Lanka, China’s Foreign Minister Wang Yi was greeted with an official request to restructure debt payments owed to alleviate the financial troubles the island country has faced since the start of the pandemic in 2020.
Colombo also asked China to provide special concessions for its exports to Sri Lanka, which amounted to US$3.5 billion in 2021.
Colombo’s rescue requests to China come as some $4.5 billion in debt comes due this year and its foreign exchange reserves, even after a $400 million currency swap with India in January, were at a meager $2.5 billion at the start of 2022.
Opposition parliamentarian and prominent economist Harsha de recently told the Sri Lankan parliament that the nation’s foreign currency reserves, which stood at almost $7 billion when Gotabaya Rajapaksa became president in 2019, could turn to negative $437 million by January 2023.
That explains why Moody’s and Fitch recently downgraded Sri Lanka’s credit rating from B to C. According to the World Bank, more than half a million Sri Lankans have fallen below the poverty line in the past two years. With inflation reaching a record high of 11.1% in November last year, many basic items are now beyond the reach of millions of struggling families.
The economic and financial crisis is a major challenge for the Rajapaksa regime that won election on the promise that strongman rule would bring stability and prosperity.
Now, there are fears of rising foreign dependence as the regime comes under immense political and economic pressure to make decisions that could see China’s influence rise massively in the future.
Although debts owed to China now account for only 10% of Sri Lanka’s total $35 billion foreign debt, the country’s current crisis presents a perfect scenario for China’s share to grow hugely in the future.
Chinese state media portrayed Colombo’s request for more Chinese capital as a gateway to “growth” while castigating as “completely untrue” Western media reports that portrayed existing projects as “white elephants.”
The Communist Party-run Global Times said China is helping “Sri Lanka’s development within its capacity” and that “bilateral cooperation is welcomed by local people.”
The article noted that China has the highest debt deferral amount among G20 nations and called on the Asian Development Bank, Japan and US to also help Sri Lanka in its time of need. It quoted a Chinese state think tank expert as saying China would likely exempt part of interest-free loans extended but that “preference” loans were not eligible for debt relief.
China’s motivations, however, are not driven solely by the Sri Lankan government’s largely pro-China disposition. They are also being driven by strong geopolitical factors in the Indian Ocean region, an emerging theater in what some see as a New Cold War pitting China versus the US and its allies including India.
In 2018, Sri Lanka failed to repay Chinese debts that Colombo used to develop the Hambantota port, which is often portrayed as an example of a Chinese “debt trap.” Columbo acquiesced to a debt for equity swap that gave Beijing a 99-year lease of the facility along with 15,000 acres of land around it.
The distressed debt deal helped China recover its money but also gave it control over a territory situated only a few hundred miles off the coast of India. Three years later, Chinese investments in Sri Lanka have continued apace.
The ambitious $1.4 billion Colombo Port City (CPC) project, which aims to create a space matching or rivaling Dubai or Singapore as a business hub, is being financed by Chinese capital. China’s Harbour Engineering Company reportedly owns about 43% of the project for a 99-year period.
Given Sri Lanka’s increasingly precarious economic and financial situations, many believe that the project could become another failed debt repayment casualty, one which could see the government hand over a key part of the capital city to Beijing in another debt for equity swap.
Critics of the project point comparatively to Laos, which recently sold a major part of its electricity grid to China after failing to make timely debt repayments.
After almost 18 petitions filed by the opposition and a cohort of civil society organizations that have claimed the project could turn Sri Lanka into a de facto Chinese colony, the Sri Lankan Supreme Court declared in April 2020 that certain provisions of the project were inconsistent with the constitution.
Of particular concern was the CPC Economic Commission Bill’s provisions that make the newly created CPC Commission, a body that has a Chinese presence to project China’s stake in the project, completely unaccountable to the Sri Lankan parliament or its committees.
While the Gotabaya government made the changes suggested by the Supreme Court, the CPC Commission – whose membership is open to non-citizens of Sri Lanka – is accountable only to the president, who after the passage of the constitution’s 20th amendment is effectively accountable to no one in Sri Lanka.
While the CPC Commission will still be audited annually, the president has the power to appoint any international firm of accountants for the purpose. Significantly, the CPC bill does not say that the Auditor General of Sri Lanka will be responsible for the audit.
The Centre for Policy Alternatives, a major think tank based in Colombo, concluded in a May 2021 report that the CPC “could be inimical to the sovereignty of the People exercised through the Executive, Legislature and Judiciary in terms of the Constitution and the Constitutional supremacy.”
Beijing owns a lease over the next 18 years for a 17-kilometer elevated highway in Colombo, an indication to some that China’s local influence is fast expanding from ports to inland projects.
With Sri Lankan authorities are now tilting towards Chinese assistance for debt repayments, which the Gotabaya government sees as essential for its political survival beyond 2023, Beijing’s growing reach has implications for Sri Lanka’s broad foreign relations, especially with neighboring India, which views China’s moves in the region with suspicion and trepidation.
Sri Lanka’s dominant Sinhala Buddhist nationalists, who have traditionally seen India as an enemy neighbor bent on domination of the island nation – are slowly coming around to the potential threat Sri Lanka’s deepening ties with China pose to national sovereignty.
For Sinhala Buddhist nationalists, sovereignty is not merely a political subject but rather has deep psychological roots. Any government failure to protect sovereignty thus has the potential to drive major opposition, which is arguably already starting to happen.
In a recent 45-point letter addressed to China’s President Xi Jinping, ruling party parliamentarian Wijeyadasa Rajapakshe effectively accused China of duplicity by using “our relations to achieve your ambition of becoming the world power at the stakes of our innocent people.”
Accusing China of deliberately pushing Sri Lanka into a “debt trap,” Rajapakshe cautioned Xi that the power of the Sri Lankan people would be expressed at the next presidential elections to restructure or revoke agreements made with China under the Gotabaya government that have proven to erode national interests and sovereignty.
President Gotabaya has seemingly been unruffled by the accusations and rhetoric, and remains committed to seeking more Chinese investment, as he recently told the Sri Lankan parliament.
But with major Chinese projects now failing to generate revenue for Sri Lanka – revenues earned from the Hambantota port and Columbo’s elevated highway now go to Beijing – new Chinese projects will inevitably come under more probity and opposition criticism.
Some speculate that could give already riled Sinhala Buddhists a new xenophobic cause to mobilize against a government that is already struggling to maintain internal unity and economic stability.
As China’s economic influence grows in Sri Lanka, so too is nationalistic opposition to its growing presence and hold.