Will playing India against China work for Colombo?
In the early 2000s, Sri Lanka eagerly adopted the Chinese growth model based on infrastructure development. The premise on which Sri Lanka was based was that it would create jobs and usher in prosperity. However, this utopian dream only led to a systemic, system-wide collapse of the very fabric of Sri Lankan society. The looming threat of collapse has seen many states attempt to win or win back the favor of Sri Lankan authorities in a quest for geopolitical dominance in the region. India is trying to reassert its traditional influence in South Asia while wary of Chinese attempts to control all of Sri Lanka’s strategic ports. On the other hand, China seems content with the fact that Sri Lanka has successfully fallen into the strategic and diplomatic trap it has set.
A combination of several factors has resulted in Sri Lanka’s current economic situation. These factors could potentially lead to a constitutional crisis in the region, with the potential to turn violent in the blink of an eye. This violence will in turn have a ripple effect on all of Sri Lanka’s neighbors in South Asia. States are scrambling to determine if there is a way to save Sri Lanka from this economic crisis.
The international community has sounded the alarm over Sri Lanka’s inability to repay its external debt in 2022. Indeed, Sri Lanka is on the verge of a sovereign debt default triggered by the fact that the Sri Lanka’s current usable foreign currency reserves have plunged below $1 billion.
Sri Lanka relies heavily on imports to meet its domestic consumption, ranging from energy supplies to essentials like food grains and medicines. This reliance on imports has recently caused a major hurdle due to the country’s dwindling foreign exchange reserves. Additionally, the country has a trade deficit of about $10 billion. Other revenue losses suffered by Sri Lanka stem from the windfall of tax cuts introduced by the government in 2019. unprecedented revenues for the government.
All these problems culminated in a severe balance of payments crisis, which worsened after the Covid-19 pandemic. This particularly affected Sri Lanka because the tourism economy dried up, so the main source of income the state depended on also came to a halt. Moreover, the government’s stubbornness in refusing to turn to the International Monetary Fund or other international banking organizations has led to a steady deterioration in credit ratings. Due to this decline, Sri Lanka was unable to issue international sovereign bonds.
With the intransigence of not turning to the IMF for help, Sri Lanka was forced to look for alternatives that would enable it to cope with the growing economic crisis. He restricted imports; however, this was not sufficient to close the external financing gap. Realizing this, Sri Lanka sought help from two competing world powers – India and China. This was a viable option as Sri Lanka has maintained strong economic ties with both countries over the decades and, in particular, economic ties with China have become extremely strong over the past two decades. In recent years, Sri Lanka has relied heavily on China to overcome its balance of payments problems. To this end, it has received a $1 billion foreign currency term funding facility from the China Development Bank. Colombo sought to increase its foreign exchange inflows by leasing the Port of Hambantota to the Chinese merchant port.
In addition, due to the difficulties faced by Sri Lanka caused by the pandemic, coupled with its inability to borrow from the international capital market, the Development Bank of China granted an additional $ 500 million to Sri Lanka in 2020. The Sri Lanka used this loan in an unprecedented context. way, where he used it to strengthen his foreign reserve position. Sri Lanka has a huge loan to repay to China and has 10 years to do so with accrued interest.
Moreover, Sri Lanka is also stuck in a strategic trap set by China. The strategic trap is so convoluted that it also has a ripple effect on the political and security aspects of the state. Moreover, China acts as a shield for Sri Lanka against criticism of its various human rights abuses at the United Nations. This in turn leads to the understanding that it allows the authoritarian and heavily militarized model of governance. Ultimately, the conundrum Sri Lanka faces as a simple debt trap would be incorrect. This is because the trap allows China to have strategic depth. Chinese projects have a long-term strategic design that creates a hybrid pattern of civil-military activity in the country. This will become a major concern for Sri Lanka and the whole region.
Sri Lanka and India have enjoyed cordial relations for decades. But that relationship began to wane when Chinese influence began to change Sri Lanka’s political dynamics. Currently, the economic crisis facing Sri Lanka has myriad ramifications from India’s perspective. This is due to the geographical proximity of the two countries. This makes India vulnerable to various problems that Sri Lankan citizens will face.
Food shortage is one such problem. This in turn will lead to widespread discontent and breed distrust. This gives rise to the possibility of anarchy that would impact both countries as it would lead to a collapse of the constitutional apparatus that Sri Lanka managed to put in place after the horrific civil war. The collapse of the constitutional apparatus and the rule of law will in turn give room for the creation of anti-social poles in the state. This would have huge implications for India’s security.
In addition, the economic crisis could lead to a mass exodus of people, caused by the unavailability of medical facilities, basic necessities and food. Refugees will be forced to cross treacherous waters to reach the shores of Tamil Nadu. Initially, there will be a slow flow of people, but it could become a flood as the days go by, and India will be forced to take them in on humanitarian grounds. This in turn would have economic implications for Tamil Nadu, which would be forced to turn to the union for help. Over time, refugee camps will represent a heavy burden, fiscal and otherwise. These camps could also pose serious security threats to India, especially if LTTE sleeper cells move into India posing as refugees.
India has always said that it will follow the principle of “neighborhood first”. In response, Sri Lanka reciprocated with its “India First Policy”. This is beneficial for India as it helps in solving security issues in the Indian Ocean region. Furthermore, Sri Lanka is geographically midway between the two main choke points of the Suez Canal and the Strait of Malacca, one of the main trade routes still in use. It is one of the main routes by which goods cross the narrow Indian Ocean sea lanes.
During this unprecedented economic crisis, Sri Lanka relied on the support of China and India. Over the past two years, Sri Lanka has strategically begun to strengthen its economic relationship with India and has sought to strengthen these ties. India saw this as a window to expand its economic presence in Sri Lanka due to its increased dependence on China. India’s $500 million credit facility to import fuel was an aid measure in the current economic crisis.
With this unprecedented economic crisis, Sri Lanka has strengthened its ties with China as well as with India. The main reason for this change of heart is that Sri Lanka has attempted a balancing act in which it seeks to take advantage of the geopolitical interests of China and India. However, it is a dangerous game that Sri Lanka is playing, trying to pit these states against each other, especially when it lacks sufficient bargaining power and faces a severe economic crisis. . It is pertinent to note that regardless of the choices Sri Lanka makes on debt restructuring, defaults and loan installments, the country’s dire economic situation will not change in the near future. In such circumstances, the aid offered by India and China will play a vital role in the survival of the state. Furthermore, Sri Lanka must be extremely careful about protecting its national interests when entering into economic agreements with China. In the long term, the country needs to facilitate business investment and trade to solve economic problems, rather than trying to take advantage of geopolitical rivalries in the region.