China’s role in Sri Lanka’s economic crisis
Beijing’s ability to come to its allies’ aid is hampered by its own domestic problems
Over the past several weeks, Sri Lanka has been experiencing an economic crisis that has brought the country to the brink of bankruptcy. Nearly $7 billion of its $25 billion in foreign debt is due for repayment this year, meaning the country is low on cash at a time when it’s also experiencing the fallout of government mismanagement of the COVID-19 pandemic.
To address the crisis, Sri Lanka will need outside financial help. One option is an International Monetary Fund loan, which would require the country to ensure it can manage its debt by, for example, restructuring existing loans. This is unlikely, since one of its major lenders, China, prefers not to engage in IMF-backed processes.
Another option is to reach out to regional economic powers for more credit. Though this would only increase its total debt, at least it would be able to avoid default.
The most obvious choice is China, since Beijing has already invested heavily in many countries of the region, seeing this as a way to build its influence in strategically important locations. However, when these countries experience financial difficulty, as Sri Lanka is right now, they’re likely to turn to Beijing for help.
And the problem for China is that its own constraints – structural economic issues and its fight against the coronavirus – could prevent it from coming to their aid. Thus, China will increasingly struggle to maintain its influence in these countries and to keep rival powers out.
Strong Ties
China’s growing investment in Sri Lanka has been strongly supported by the administrations of both current President Gotabaya Rajapaksa and former President Maithripala Sirisena. China is already Sri Lanka’s fourthlargest lender after international financial markets, Japan and the Asian Development Bank.
The ADB is a Japanese-led institution and reflects mainly Japanese and U.S. interests. Its Chinese-led counterpart, the Asian Infrastructure and Investment Bank, also finances significant infrastructure projects in Sri Lanka, like affordable housing and land redevelopment.
In recent decades, China has lent Sri Lanka over $5 billion for large-scale infrastructure projects as part of Beijing’s Belt and Road Initiative. This money has gone toward funding roads, an airport and several ports.
One of its most significant projects is the Colombo Port City, in which China’s $1.4 billion stake is the largest single foreign investment in Sri Lanka’s history.
But the country is now heavily indebted to China, having taken loans at rates ranging from 3% to 6% compared to the 1% to 3% rates offered by the World Bank and IMF. Unable to pay them back, Sri Lanka has even had to ask China to swap some of the debt it owes for the country’s own stocks.
China has the strongest influence in Sri Lanka of any foreign country, having supplanted India over the past decade despite India’s proximity to the island nation. That’s partly because its investments there have steadily increased since the early 2010s but also because Beijing has gradually built political ties and pulled Sri Lanka into its orbit.
Sri Lanka’s China-friendly political tilt, driven by the promise of quick and efficient economic and technical assistance, can be seen in both the Sirisena and Rajapaksa governments. China succeeded in winning Sri Lanka’s trust because of its willingness to lend money to countries shunned by the international community for their poor human rights records.
Indeed, their relationship strengthened after allegations emerged in Sri Lanka of state-sponsored human rights abuses during the Tamil Tigers-led insurgency in the country.
China’s Motivations
What’s in it for Beijing? China has been investing massively in infrastructure and other projects in nearby countries, primarily because this helps guarantee its access
to foreign markets through key regional maritime routes. These investments are a substantial source of Chinese influence in the region.
In addition, Sri Lanka is of major significance in China’s “string of pearls” strategy in the Indian Ocean. The port of Hambantota, operated as a joint venture and currently leased to China for 99 years, straddles an extremely busy east-west shipping route. It offers a diversified range of transport and logistical services.
China has a strategic imperative to gain immediate access to the Indian Ocean and control ports in the Asia-Pacific region, so that it can conduct trade and maintain strong relations with its numerous partners. Hambantota is close to major sea lanes, so building a port there could help Beijing guarantee access to international trade routes nearby.
However, China hasn’t exactly been enthusiastic about coming to its ally’s aid. It even refused to restructure Sri Lanka’s debt when asked.
India, on the other hand, was the first country to provide immediate help, with a $1.5 billion line of credit. A line of credit may not be ideal given Sri Lanka’s situation, but right now it needs whatever help it can get. New Delhi’s offer is clearly an attempt to pry the island nation away from Beijing – not surprising since India is trying to counter China in the Indo-Pacific region, where the two regional powers have competing interests.
For India, wooing one of China’s “pearls” would be a big step.
China’s hesitancy in helping Sri Lanka is a result of domestic constraints. The East Asian country is facing its own structural economic problems and has been battling an outbreak of the omicron COVID-19 variant for months, which has led to partial or full lockdowns of major cities including its financial hub, Shanghai. Given that Beijing spent weeks considering whether to provide Sri Lanka with financial assistance, it seemed that China was either unwilling or unable to help.
On April 25, however, talks between the two countries began after Chinese Premier Li Keqiang said China was ready to provide much-needed assistance for Sri Lanka. But many in Sri Lanka see this as an empty promise – one that came too late and only as a response to Sri Lanka’s talks with the IMF.
Doubts about China’s credibility aren’t surprising given that Sri Lanka in the past has had to find new financing for BRI projects after China failed to come through with promised funds on time.
Waiting in the Wings
China’s role in helping Sri Lanka resolve its economic crisis is important because it will set a precedent for other countries in South and Southeast Asia that may also face economic difficulties in the near future.
Also, China’s global image is in part based on its ability to assist and invest in smaller neighbouring countries, so if Beijing fails to come through, it could cast a negative light on its international standing.
Moreover, as seen with India, other powers are waiting in the wings to fill the void left by Beijing. China’s failure to act opens the door for other nations that want to counter Chinese influence in the region. And Sri Lanka has no other choice but to rely on its largest creditors, many of which have an interest in curbing China’s regional influence.
India, as mentioned, is one example, but Japan is another potential source of financial assistance. It has historically been a major source of development aid for Sri Lanka and offered help during the country’s last economic crisis in 2016.
The U.S. has also provided financial assistance to countries of the region and may welcome an opportunity to undermine China here. Furthermore, Sri Lanka expects to receive $500 million as emergency aid from the Asian Development Bank and World Bank – two institutions affiliated with countries that have an interest in countering Chinese influence – in the next six months.
A lot depends on how China chooses to manage Sri Lanka’s economic crisis. Its hesitation has already given an opportunity for several other players to step up. These actors have a common intention: to chip away at China’s foothold in South and Southeast Asia.
Whatever China chooses to do, it’ll have to give up something significant – money or influence – in the process.