Guest Column
Political-economic Turmoil in Sri Lanka: Competing interests of China and India
By Asanga Abeyagoonasekera
Even before its current economic crisis, Sri Lanka could already be classified as a ‘fragile state’. It had endured a multitude of internal and external shocks, ranging from a 26-year civil war, Islamic terrorist attacks, accusations of human rights abuses by the government, as well as economic-political dysfunctionality. In the present context, the fragile state has shifted towards a 'crisis state'—in which its institutions face serious contestation and are potentially unable to manage conflict and shocks. The unmanageable economic crisis has triggered a political dysfunctionality. A violent protest on April 1, in which hundreds nearly succeeded in storming the President’s residence, had a ripple effect as public demonstrations spread across the island calling for an end to the Rajapaksa family rule, corruption and the country’s economic woes. Galle Face Green, a beachfront urban park that was once a popular weekend destination for families, is now occupied by protestors and resembles the Tahrir square during Arab Spring.
Economic Crisis
Sri Lanka faces its worst financial crisis since its independence in 1948. Prolonged power cuts, shortages of fuel, essential food and medicine has driven public anger to unprecedented levels. On April 3, a political crisis emerged as the entire cabinet resigned, forcing President Gotabaya Rajapaksa to reappoint a new cabinet in order to ensure the continued functioning of his administration. Sri Lanka’s economic crisis was triggered primarily by the country’s longstanding liquidity and insolvency issues. Inadequate foreign reserves forced the government to suspend foreign debt repayment, defaulting for the first time in its history. Other contributing factors include the government’s tax cuts which led to a drop in state revenue, its unsustainable loans, and a lack of external expertise due to its inward policy posture. The untimely occurrence of the COVID-19 pandemic also had a devastating impact on tourism revenue and remittances to the island. The country’s economic problems were further aggravated by the government’s sudden decision in April 2022 to ban chemical fertilizers and shift to organic farming. The agricultural sector was wholly unprepared and the shortage of organic fertilizers led to a drop in crop yields and sent food prices surging.
Chinese Debt trap to Strategic trap
Sri Lanka’s debt portfolio, particularly the proportion of Chinese loans, grew significantly under the Rajapaksa regime. Some academics have sought to dispel the popular notion of Chinese ‘debt-trap diplomacy’, arguing that China holds just 10 percent of the country’s total foreign debt—on par with Japan. However, Chinese interest rates—at more than 6 percent—is significantly higher compared to other loans.
Apart from the debt trap, China is also engaging in ‘strategic-trap diplomacy’ in Sri Lanka, facilitated by the Rajapaksa regime's foreign policy. The Rajapaksa-led political party—the Sri Lanka Podujana Peramuna (SLPP)—receives assistance from Beijing, including political funding, allowing it to strengthen its autocratic rule. The Chinese government also supported the Sri Lankan government over its alleged human rights abuses at the United Nations Human Rights Council, leading Colombo to provide reciprocal support to Beijing over the latter’s alleged mistreatment of Uighurs in Xinjiang. In addition, China provided military and surveillance assistance to the Sri Lankan regime. By cooperating so closely with Beijing, Rajapaksa’s foreign policy allowed Sri Lanka to fall deeper into the Chinese strategic-trap. Furthermore, it demonstrated a shift in Sri Lanka’s previous approach of maintaining balanced foreign relations with other nations, including its closest neighbour, India.
China's growing influence over the island-nation has led to heightened geopolitical competition with India. In 2019, India objected to the development of wind farms on three Sri Lankan islands by Chinese firms as they were close to India’s southern shores. The project was subsequently terminated and awarded to India. And in 2021, Sri Lanka unilaterally withdrew from a tripartite agreement with India and Japan on the development of the strategic East Container Terminal (ECT) at Colombo Port. Though the Sri Lankan government subsequently offered India the development of the West Container Terminal as compensation, some insiders have alleged that China played a role in the cancellation of the ECT contract.
Following the passing of the Colombo Port City Economic Commercial Bill in April 2021, approval was given for the establishment of China’s extra-jurisdictional Special Economic Zone in Colombo Port City, creating what one expert referred to derisively as “a ‘Chinese province’ in Sri Lanka”. Further, a visit by Chinese ambassador Qi Zhenhong to Sri Lanka’s Tamil-majority Northern province in December 2021 was seen as disregarding Indian sensitivities and an attempt to expand Chinese footprint in the area—a direct concern for India.
India-China Competing Interests
Amidst the current economic crisis, India has been trying to outdo China in providing financial assistance to Sri Lanka. A four-pillar initiative was bilaterally agreed between India and Sri Lanka, which included:
[L]ines of credit for food, medicines and fuel purchases granted by India, a currency swap agreement to deal with Sri Lanka's balance of payment issues, an ‘early’ modernisation project of the Trinco oil farms…and a Sri Lankan commitment to facilitate Indian investments in various sectors.
Sri Lanka has borrowed from India and China multiple times to minimise the crisis. In late 2021, New Delhi arranged a $1.9 billion credit line with a $500 million credit-line for fuel, while Beijing was requested to restructure repayments on $3.5 billion of debt loans. At around the same time, China provided Sri Lanka with a $1.5 billion yuan-denominated swap. Since the start of the pandemic, Beijing has extended $1.3 billion in syndicated loans to the country. More recently, Sri Lanka is seeking another $1.5 billion credit-line from China as well as syndicated loans of up to $1 billion.
Sri Lanka urgently needs around $3 billion in bridge financing from the International Monetary Fund (IMF) to help restore supplies of essential items. The IMF will push objective reforms to stabilise the crisis, including immediate restructuring measures on its existing debt portfolio. India and China can both play a significant role in stabilising Sri Lanka—an essential partner for both nations in the Indian Ocean. For India, the economic crisis might be an opportunity to reassert its influence and weaken China’s grip over its neighbour. Yet, New Delhi would also have to carefully manage its engagement with Colombo, given how it has previously been accused of interfering in Sri Lanka’s domestic politics.
While the protestors want President Gotabaya Rajapaksa as well as his corrupt family members to be removed from power, the regime has launched a highly visible damage control campaign which includes admitting their policy failures. However, this may not be sufficient to quell the public anger. Protesters have not only called for an end to the Rajapaksa regime, but also greater accountability and investigations into corruption, including those involving large-scale infrastructure projects that will strain external relationships, especially with China. The previous administration of President Maithripala Sirisena had briefly suspended a $1.4 billion development project with China Harbour Engineering Company in 2015 over bribery allegations involving Mahinda Rajapaksa (Gotabaya’s brother and himself a former Sri Lankan president), though the subsequent investigation had no conclusive outcome. Regardless, to avoid any potential prosecution, the Rajapaksa family will likely try to hold on to its political power for as long as possible.
The need of the hour is an effective interim government, one that can re-establish the nation’s international credibility amidst the political-economic crisis, and smoothly navigate negotiations with the IMF for financial assistance. China and India are key players who could stabilise the situation, but they would need to set aside their competitive interests and focus on advising and assisting in objective reforms. A dysfunctional Sri Lanka is a risk to both India and China. What is immediately required is advice to carry out swift and sensible fiscal adjustments and recalibrate its ill-calibrated policies with assistance from the international community.
Asanga Abeyagoonasekera is a Senior Fellow at the Millennium Project in Washington DC. He has previously led two government think tanks in Sri Lanka providing strategic advocacy on foreign policy and security. He was the Founding Director-General of the Institute of National Security Studies Sri Lanka (INSSSL), a national security think tank under the Ministry of Defence until January 2020. Abeyagoonasekera has also served as the Executive Director at the Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKIIRSS).
The views expressed in the article are solely those of the author(s) and do not necessarily reflect the position or policy of the Lee Kuan Yew School of Public Policy or the National University of Singapore.
News Reports
Bilateral relations
Wang Yi’s India visit was China trying to return to diplomatic status quo, says MIT prof Fravel
The Print, April 22
Chinese Foreign Minister Wang Yi’s visit to India last month was an indication that Beijing wants to reset ties with New Delhi and return to a “diplomatic status quo” of sorts in the backdrop of the Russia-Ukraine war, Professor M. Taylor Fravel, China expert at the Massachusetts Institute of Technology (MIT), has said.
Chinese hackers target Indian power grid assets in Ladakh
The Economic Times, April 20
Chinese state-sponsored hackers had targeted India's power grids in Ladakh possibly for information on India's critical infrastructure or to prepare for sabotage in the future, according to the American cybersecurity firm Recorded Future in a report released earlier this month.
Official says China has installed mobile towers 'very close' to Indian territory
The Economic Times, April 17
Chushul Councillor Konchok Stanzin in a tweet flagged the issue and claimed that three mobile towers have been installed near China's hot spring very close to the Indian territory.
If harmed, India will not spare anyone, says Rajnath Singh in a strong message to China
The Indian Express, April 15
Singh, in his address to the Indian-American community in San Francisco, also sent a subtle message to the US that New Delhi does not believe in a diplomacy of “zero-sum game” and its relationship with one country cannot be at the expense of the other.
News Reports
China and India in the Region
US to help India project force to counter China’s naval activity: US official
Hindustan Times, April 27
The United States will work closely with India in the Indian Ocean region to ensure a free and open Indo-Pacific and to bolster Indian abilities to project force in the face of increased activity by the Chinese navy, a senior US government official said on Wednesday (April 27).
US won’t rule out military action if China establishes base in Solomon Islands
The Guardian, April 26
Ambassador Daniel Kritenbrink warned that the security pact presents “potential regional security implications”.
To counter China's BRI, MEA launches growth model
The Economic Times, April 25
India's Global Innovation Partnership (GIP) launched with the UK on Friday at the PM Narendra Modi-Boris Johnson summit will provide a template to use the TDC Fund for trilateral projects with other countries like Japan, Germany, France and the EU who are keen to partner with India in the innovation and development sectors.
India offers carrots to 'pro-China' neighbors Sri Lanka, Nepal
Nikkei Asia, April 24
Political instability in South Asia opens diplomatic doors for New Delhi.
India wants to be strong friends with the West, but it needs Russia, says minister
South China Morning Post, April 23
India is the world’s top buyer of Russian weapons, which it uses to deter aggression from neighbours Pakistan and China.
India and Britain bulk up trade and defence ties amid ‘converging concerns’ on China
South China Morning Post, April 22
British PM Boris Johnson described India-UK ties as ‘one of the most defining relationships’ as he signed investment deals worth US$1.3 billion.
Eye on China, India and US plan sea patrols and intel sharing
The Times of India, April 21
The announcement was made at the recent 2+2 dialogue in Washington, DC.
News Reports
Trade and Economy
Covid Lockdowns Send China’s Economy Reeling as Outbreaks Spread
Yahoo Finance, April 26
China’s economy slowed rapidly in April as the costs of both a worsening COVID outbreak and the nation’s stringent approach to eliminating the virus took their toll.
India says Tesla should not import cars from China for domestic sale
Channel News Asia, April 26
US electric vehicle maker Tesla Inc is welcome to set up shop in India, make cars there for sale and export them, but must not import cars from China, the transport minister said on Tuesday (April 26).
More than 30% companies in India, China highly vulnerable to risks of Russia-Ukraine conflict: Moody’s
Mint, April 25
Refinancing risks, supply chain disruptions and high commodity prices are the main factors threatening these companies amid the Russia-Ukraine conflict.
The long road to Atmanirbhar Bharat: India’s trade deficit with China hit record $77 bn in FY22
The Print, April 25
Data from China’s General Administration of Customs shows India's exports to Beijing stood at $26.46 billion while its imports from China stood at $103.47 from April 2021 to March 2022.
News Reports
Energy and Environment
After China, India has most proposed coal-powered plants: Report
The Times of India, April 26
This was revealed in the latest Boom and Bust report released by Global Energy Monitor on Monday (April 25).
EU pushes for energy cooperation with India as it aims to ‘diversify away’ from Russian oil
The Print, April 25
At a meeting with PM Modi, European Commission President Ursula von der Leyen expressed a keen interest in partnering with India in its quest for renewable energy.
China axes 15 coal plants abroad after Xi pledge, but loopholes remain
Forbes India, April 22
The cancelled projects would have generated 12.8 gigawatts of electricity — or the total power generation capacity in Singapore, a new study finds, but a lack of clear rules has allowed Chinese developers to continue to build new coal power projects despite the ban.
Chinese solar module companies renege on contracts with Indian firms
The Hindu Business Line, April 20
More than 80 per cent of India’s solar PV module market is controlled by Chinese suppliers.
Analyses
Why India Must Engage Taiwan Even If It Ruffles a Few Chinese Feathers
News18, April 27
By Sana Hashmi, Visiting Fellow at the Taiwan-Asia Exchange Foundation, and a Non-Resident Scholar at the Research Institute for Indo-Pacific Affairs, Japan
India has kept a low profile with Taiwan due to a protracted border issue and repeated standoffs with China.
All roads connect Delhi and Brussels
ORF, April 24
By Amrita Narlikar, President of the German Institute for Global and Area Studies (GIGA), and Samir Saran, President of the Observer Research Foundation (ORF).
For both India and the EU, strong bilateral ties rooted in close cooperation on green transition, digital transformation, and maintenance of the geopolitical landscape could be a game-changer.
India-Russia: A friend in need
The Interpreter, April 22
By Christopher Snedden, Australian political scientist, politico-strategic analyst, academic researcher and author
New Delhi’s reluctance to speak out on Ukraine is also influenced by own ambition in the disputed Kashmir region.
China’s Diplomatic Investments in South Asia
ISAS Insights, April 20
By Amit Ranjan, Research Fellow at the Institute of South Asian Studies (ISAS), and Zheng Haiqi, a PhD Candidate in the School of International Studies, Renmin University, China, and an ISAS Non-Resident Fellow
Between January and March 2022, Chinese Foreign Minister Wang Yi visited all the countries in South Asia, apart from Bangladesh and Bhutan. His visit highlighted the indispensable nature of the region to China.
Why China won’t condemn Putin’s Ukraine war
East Asia Forum, April 20
By Alexander Korolev, Senior Lecturer in Politics and International Relations at the University of New South Wales, Sydney.
Unless the fundamentals of US–China relations change, it is unlikely that China would risk undermining its strategic alignment with Russia.
Global and regional confrontation in South and Southeast Asia
Bulletin of the Atomic Scientists, Volume 78, no.2 (2022), pp. 78-83
By Achin Vanaik, retired professor of international relations and global politics at Delhi University
The security situation in South and Southeast Asia plays out amid a global geopolitical order. The United States remains the single most powerful country and will remain so for some time; Russia is a rough equal only with respect to its nuclear arsenal; and China will soon become, in terms of total economic output, the world leader—but its per capita income level will not soon approximate those of Western developed countries. This article looks into how India and Pakistan fit into the global and regional security landscape, and how their respective relationships with the United States and China have evolved as America pivoted to Asia.
Compiled and sent to you by Centre on Asia and Globalisation and the Lee Kuan Yew School of Public Policy, National University of Singapore.
Have any feedback or comment?
Contact our editor: Byron Chong (research associate), email: decb64_Ynlyb24uY2hvbmdAbnVzLmVkdS5zZw==_decb64
Subscribe