Chinese reluctance to mitigate Sri Lankan crisis

(MENAFN- Colombo Gazette)

Wijedasa Rajapakse, a member of Sri Lanka's Parliament in the ruling party wrote a six-page letter to Chinese President Xi Jinping with the accusation that they trapped Sri Lanka into a debt trap to expand Chinese influence. According to Sri Lankan Central-bank records, Sri Lanka owes China nearly $3.5 billion as of the end of 2020 , excluding loans to state firms.

Although only 10% of Sri Lanka's debt is owed to China , there has been evidence of how Beijing is using debt distress as a way to build ports, railways, pipelines, and other infrastructure. One piece of evidence to support this accusation is Sri Lanka's settlement of an unpaid loan by granting a Chinese state company a 99-year lease on the facility.

The Sri Lankan debt crisis not only caused political controversy with China, but also opened a window of opportunity for India to counter Chinese influence in the Indian Ocean region. Due to a severe shortage in oil, gas, medicines, and food items because of a shortage of forex, Sri Lanka  was under huge economic crisis; however, India's timely help rescued the emerald island.

According to reliable sources, India in the last six months has provided assistance on several fronts to its tiny neighbor to tide over its economic crisis.

After releasing a statement that they would continue to support Sri Lanka in their time of economic distress, India agreed to pay loans totaling $1.5 billion . In addition to continuing loans, some recent deals include one for India's Adani Group to operate in Colombo and an agreement for a subsidiary of the state-run Indian Oil Corporation to work in the eastern port city of Trincomalee.

The Indian assistance at this time is timely and impactful on several fronts. Sri Lanka  would certainly need more assistance from them to ride over 2022.

Reluctance of China

In the past decade, China has been the largest foreign investor in and the second-largest foreign lender to Sri Lanka.

In the past 24 months, China, surpassing India, has become Sri Lanka's top import partner (in 2020, Sri Lanka imported $3.58 billion worth of goods and services from China compared to $3.01 billion from India).

In every financial measure, China has the upper hand in Sri Lanka compared to India. What's more, China provides blanket support to Sri Lanka in international forums such as the United Nations and its bodies, particularly in the Security Council and Human Rights Council (UNHRC).

Recently, Sri Lanka appealed to China if a restructuring of the debt could be arranged to mitigate the economic crisis that had arisen in the face of the COVID-19 outbreak. The president of debt-ridden Sri Lanka had categorically asked China for the restructuring and access to preferential credit for imports of essential goods, as the island nation struggles in the throes of its worst economic crisis.

It has now come to light that China had refused Sri Lanka 's appeal to reschedule its huge debt burden, as reported by ANI. Beijing had reportedly shown Colombo the door and 'kept mum on Sri Lanka's request for debt restructuring'. China has reportedly informed that it has no such system of rescheduling debt payments.

Central Bank figures show that current Chinese loans to Sri Lanka total around US$3.38b, not including loans to state-owned businesses, which are accounted for separately and thought to be substantial.

“Technically we can claim we are bankrupt now,” said Muttukrishna Sarvananthan, principal researcher at the Point Pedro Institute of Development.“When you have your net external foreign assets in the red that means you are technically bankrupt.”

As per media reports, the key concern, is how such a negative situation would impact the attitude of Colombo towards borrowings from China, and what it would mean for the ultimate relation between China and Sri Lanka. There is concern that the experience of Sri Lanka is prompting countries like Myanmar, Malaysia and Nepal to suspend Chinese investment projects”. But Beijing has not made a public commitment for debt relief assistance to Sri Lanka so far.

Doubts are expressed by certain quarters that 'China has chosen to take advantage of the current confused political environment in Sri Lanka to promote an alternative model to the democratic model and expand its economic assistance'. Further, according to political observers, China-assisted projects in Sri Lanka are likely to deepen the debt of the island nation. Moreover, locals of Sri Lanka are protesting against some of these projects which will affect their livelihood.

The Sri Lankan debt burden and insolvency issues as reported by the IMF recently,were a result of China's Belt and Road Initiative (BRI) projects like Hambantota Port and Colombo Port City for which Chinese agencies lent large amounts to Sri Lanka under stiff terms of repayment.

Notably, in 2021-22, Colombo's debt repayment to Beijing amounted to nearly USD 2 billion. Further, Hambantota port has already been leased out to China for 99 years against USD 1.2 billion.

One of these projects is an industrial park attached to the Hambantota International Port which has incited violent protests by local people as they fear that the area would become a Chinese colony, reported a media organization.

Given the current crisis coupled with the absence of any assurances from China for concrete support, Sri Lanka seems to be reassessing the extent to which it can bank on China.

However, it is nearly impossible for Rajapaksa government to deny China its committed space in Sri Lanka due to arbitration threats and likely obligations. It is an economic annexation of a sovereign country and not a debt trap alone.

Strategy

When you look at the“String of Pearls” with its empty ports, quiet airports and lonely highways, you could think China had made poor investments with little opportunity for return. But these are part of a developing Chinese superhighway. Nations like India and Japan are finally waking up to the realization that Chinese-controlled ports don't just take in tankers. They take in warships. Airstrips don't just accommodate cargo planes; they also provide landing areas for fighter jets.

Last August, U.S. Secretary of State Rex Tillerson spoke at an East Asia ministerial summit and admitted,“We will not be able to compete with the kind of terms that China offers. But countries have to decide , what are they willing to pay to secure their sovereignty and their future control of their economies?”

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