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India tries to pull Sri Lanka out of China’s embrace


Image from February 2022 shows Subrahmanyam Jaishankar, India’s foreign minister, speaking during the second day of the Munich Security Conference. Jaishankar’s visit to Colombo on Monday comes amid an economic crisis in Sri Lanka.

Sven Hoppe | image alliance via Getty Images

India’s Foreign Minister Subrahmanyam Jaishankar was in Sri Lanka this week offering to help the struggling Sri Lankan economy in a bid to break free from China’s decades-long embrace.

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

Having a giant, increasingly assertive neighbor closely entwined with Sri Lanka has unsettled India, which is deadlocked with China over its disputed Himalayan border. The Sri Lankan economic crisis offers an opportunity for India to get out of Beijing’s grasp affect.

Located right near busy East-West shipping lanes, Sri Lanka has attracted billions of dollars of investment under China’s Belt and Road Initiative. The program, launched in 2013, aims to build ports, roads, railways, pipelines and other infrastructure across Asia.

But China has taken over at least one strategic port when Sri Lanka defaulted on its debt. New Delhi won a small but significant victory on Tuesday by winning a power project previously granted to China..

India is also trying to outdo China in its ability to provide financial support to Sri Lanka, which is running out of dangerously low foreign exchange reserves to repay its debt. According to central bank data obtained by Reuters, Sri Lanka currently has around 2 billion dollars in foreign exchange reserves against $7 billion in total debt due this year, includes $1 billion worth of bonds maturing in July.

China’s presence is of interest to India, rightly so. But India and Sri Lanka are also maritime neighbours. Any instability in Sri Lanka will have spillover effects on India.

Gulbin Sultana

Associate, Manohar Parrikar . Institute for Defense Research and Analysis

During Jaishankar’s travels, Sri Lanka searched for a $1.5 billion credit line to buy essential items, Reuters reported. That’s on top of the $2.4 billion that India has moved since January through currency swaps, loan deferrals and lines of credit.

China, which has a larger pocket, has yet to join Sri Lanka’s request for a $2.5 billion credit line or restructure its overall debt. About 22% of them Sri Lanka’s debt is the debt of bilateral creditors – China and Japan (10% each) as well as India (2%).

Milk, medicine, gasoline run out

Food, milk, medicine and other essential items are in short supply when the inflation rate rises above 17%. Power cuts were common and some people died of heatstroke while waiting in long lines to buy fuel.

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

“The presence of China is a concern for India,” she told CNBC. “But India and Sri Lanka are also maritime neighbors. Any instability in Sri Lanka will have spillover effects on the region. India,” she told CNBC.

More than a dozen refugees have come to India by Boats and Indian media reported, citing intelligence sources, that an estimated 2,000 more people will be watching in the coming days.

Sri Lanka’s nationalist Rajapaksa government, which had hoped to get through the crisis without the help of the IMF, reversed course this month. Finance Minister Basil Rajapaksa, who is also the President’s brother, will soon travel to Washington to present policy proposals to lenders.

Sri Lanka searched IMF bailed out 16 times in the past 56 years, second only to Pakistan in debt.

The current crisis is fueled by tax cuts that hit government revenue already strained after The Covid-19 pandemic has collapsed the $5 billion tourism industry. In 2020, Real GDP fell 3.6% and Sri Lanka lost access to international debt markets after its ratings were downgraded.

Caught in the ‘strategic trap’

So far, China has not agreed to Sri Lanka’s debt restructuring request. Ganeshan Wignaraja, a non-resident senior research fellow at the Institute of South Asian Studies at the National University of Singapore, attributes China’s reluctance to two factors.

“First, it will set a bad precedent for other countries that have borrowed from China,” he told CNBC from Colombo. “And second, it will associate China with failure because the Sri Lankan economic model is based on China.”

China’s Foreign Ministry did not immediately return CNBC’s 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. No reliable figures are available, but the cumulative value of China’s infrastructure investment in Sri Lanka is estimated to be over $12 billion from 2006 to 2019.

China’s large-scale infrastructure loans are among the immediate concerns; None of them can generate the expected revenue to repay the loans.

Asanga Abeyagoonasekera

senior fellow, Washington-based Millennium Project

In addition to Sri Lanka’s financial crisis, Colombo was also caught in a “strategic trap”, Asanga Abeyagoonasekera, a Sri Lankan geopolitical analyst and senior member of the Washington-based Millennium Project.

He describes the strategic trap as an extension of the “debt trap” with human rights, political and security dimensions. China protects Sri Lanka from criticism over its human rights record at the United Nations and advocates a more militarized, authoritarian model of governance than democracy, he added.

“Quantitative economic forecasts of debt traps fail to capture the strategic depth of Chinese projects. Chinese projects with a long-term strategic design can comfortably yield a ‘hybrid model’.” of civilian-military activity for the country, a security concern for Sri Lanka and the entire region,” said Abeyagoonasekera.

“China’s large-scale infrastructure loans are one of the immediate concerns; none of which can generate the expected revenue to repay the loans,” he said, calling the Chinese loans “unequivocal.

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

Ms. Wignaraja suggested Sri Lanka would be better served if India added a “strong voice” to Colombo’s implementation of an IMF program calling for sweeping economic reforms.



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