Ukraine war hurting Sri Lanka, a boon for India
More than two years after the Covid-19 pandemic started, Sri Lankans recently found themselves again barred from going out in public places. But the curfew had nothing to do with public health. Instead, it was a desperate attempt to quell unrest amid economic turmoil which that has seen the prime minister and cabinet resign, parliament attacked, multiple deaths and worries about a military crackdown.
With food and fuel prices skyrocketing following Russia’s invasion of Ukraine, almost every country faces a cost-of-living crisis with mounting political implications. Nowhere is that more true than in South Asia, where it has toppled governments in both Pakistan and now Sri Lanka.
In both cases, that brings stark geopolitical implications, endangering more than a decade of expansion, investment and engagement from China. As the primary economic backer of both countries, Beijing now finds both they and the political elite it promoted face a backlash, particularly against the repayment of debts. That leaves China risking losing both power and enormous sums of money, and rival India scenting opportunity.
The Ukraine war-related price spike has also dramatically accelerated the growing humanitarian crisis in Afghanistan, a nation with which Beijing is still unsure what approach to take and where not even neighbour and supporter Pakistan has proven willing to publicly recognise its Taliban rulers.
Last month saw Prime Minister Imran Khan become the first Pakistani leader to be removed by a no-confidence vote. Sri Lankan President Gotabaya Rajapaksa also faces mounting calls to go after, his brother, Mahinda, also a former president, quit as prime minister and their family house torched by an angry crowd.
In both cases, inflation supercharged by the Ukraine war accelerated a pre-existing economic and currency slump, devastating already limited forex reserves — leaving Sri Lanka in particular struggling to import essential goods and make repayments on an estimated $51 billion (about 1.76 trillion baht) in foreign debt, with Beijing believed by far to be its largest creditor.
Chinese-backed support for Sri Lanka increased sharply after Mahinda Rajapaksa was president from 2005-15, and then again after brother Gotabaya took office in 2019. Initially, it was used to fund a military expansion to crush ethnic Tamil Tiger rebels, then infrastructure investment often heavily focused on the southern Hambantota region.
On a visit to Colombo in January, Chinese Foreign Minister Wang Yi praised the elder Rajapaksa as a “friend to China” — but younger brother and President Gotabaya was already lobbying for China to offer debt forgiveness, something Beijing has not publicly committed to — likely out of fear of setting a precedent for other countries.
Foreign lending and infrastructure projects have been central to Beijing’s Belt and Road infrastructure programme for strategic influence across Asia, Africa, the Middle East and Europe. Both the United States and India have warned smaller nations China has them in a “debt trap”.
The Ukraine-related price spike is far from the only cause of Sri Lanka’s woes — a drying up of foreign currency income from tourism during the pandemic is another major factor, as is a disastrous government attempt to wean Sri Lanka off chemical fertilisers last year.
As in Pakistan, however, the price spike has exacerbated those woes dramatically. It is also handed India an unexpected diplomatic gift — through continuing to pursue its alliance with the United States against China while also keeping relations with Moscow open, New Delhi has maintained access to discounted Russian oil and gas.
Despite the pandemic, India also has a relatively healthy harvest this year — but with inflation also rising there, the government of Narendra Modi has yet to decide how much, if any, to export.
With less than $50 million now in its foreign reserves, Sri Lanka is now only able to pay for fuel imports thanks to a credit line from India — agreed at $500 million at the start of this year, then extended by an additional $200 million last week. But that new cash will only cover four import cargoes for May, and Sri Lanka last week said it would need another $500 million to keep shipments going. Other Indian aid already runs to several billion. If a government cannot be appointed this week, Sri Lanka’s Central Bank has warned the economy will collapse.
Mr Modi’s government would like to deepen India’s interests in Sri Lanka, ideally kicking China out. But after a disastrous military intervention in the late 1980s and early 1990s, and with its own domestic cost of living also rising, he is also wary, this week ruling out sending in troops and denying offering sanctuary for fleeing Sri Lankan leaders.
China’s response to this week’s turmoil in Sri Lanka remains circumspect, saying it hoped both leadership and opposition would bear in mind the “fundamental interests of the country” as it looks to form a government. Gotabaya Rajapaksa has pledged to appoint a new prime minister and cabinet this week — but the opposition is split on how that should be delivered.
China has also pledged humanitarian aid and there is talk of its own credit lines alongside a potential bailout from the Beijing-based Asian Infrastructure Investment Bank, which might yet offer a route to maintain China’s interests in the country.
But to do so risks telling every other Chinese client government that in crisis Beijing may offer a blank cheque. With the alternative a potentially catastrophic loss of influence, that may give the Chinese state another reason to be irritated at Russian President Vladimir Putin for the invasion of Ukraine, with the potential for that irritation to escalate if the war drags on for many months.