Sri Lanka: Economic Security - Balancing India and China

Updated: Jan 24


Image Courtesy Lankasara.com

Crisis provides an opportunity and so should it be with Sri Lanka facing one of the severest on the economic, energy and food security front due to disastrous policies of the Rajapaksa Government in the last few years, magnified by COVID 19.


Importantly the economic crisis should lead the government led by a China leaning Rajapaksa family – President Gotabaya, Prime Minister Mahenda and Finance Minister Basil to balance relations with India, a move that is long overdue.


Sri Lanka’s dilemma of choice between the two regional powers – India and China which was created since the long civil war with the LTTE in the 1990s may resolve itself if the government wisely chooses to do what most countries in South Asia except Pakistan have succeeded – keep the ball floating between New Delhi and Beijing to extract maximum economic and development advantage.


By turning towards China, the Rajapaksa governments of the past and present violated one cardinal principle of diplomacy for states in the region – India First.


Yet the fact remains that given proximity and linkages geographic, political and socio-economic there is no gainsaying of a degree of dependency towards India without losing autonomy and sovereignty, fears that had rankled in the past.


Moreover, today India has the economic clout to provide reasonable assistance in the neighbourhood and beyond which is sustainable in nature and does not create a debt burden on smaller economies.


There are indications that the Rajapaksa government may have awakened to this new reality and is reaching out in equal measure to New Delhi while not shunning links with Beijing, as opting for one over the other has proved untenable.


And India is responding having set the framework of four pillars for assistance to the debt-ridden economy.


In latest announcements, India has offered a new Line of Credit (LOC) of USD 500 million to Sri Lanka for purchase of petroleum products.


Indian External Affairs Minister Dr. S. Jaishankar extended this support in letter addressed to the Foreign Minister of Sri Lanka, Prof. G.L. Peiris, the High Commission of India in Colombo said in a release


This comes even as the Chinese Foreign Minister Mr Wang Yi was in Colombo last week. President Gotabaya Rajapaksa requested to help restructure debt repayments to weather a worsening financial crisis, during a meeting with Mr Wang Yi.


"The president pointed out that it would be a great relief to the country if attention could be paid on restructuring the debt repayments as a solution to the economic crisis that has arisen in the face of the Covid-19 pandemic," Rajapaksa's office said in the statement.


Meanwhile Economic and Commercial Office of the Chinese Embassy in Sri Lanka confirmed on January 11 that Sri Lanka’s People’s Bank has been removed from its blacklist. after it honoured the Letter of Credit obligation of USD 6.9 million to China’s Qingdao Seawin Biotech Group.


A degree of coercion by China is evident in this transaction, yet there appears to be willingness to assist Sri Lanka.


While it may be too early to predict how a zero-sum game can be converted into a cooperative economic framework mutually beneficial to Colombo, the Sri Lankan government hopefully has learned the importance of balancing.


Size and Reasons for Economic Crisis

Unlike other countries in South Asia which emerged from the Delta wave of COVID 19 and recorded positive economic growth, Sri Lanka continued a 1.5 percent negative economic growth rate for the third quarter of 2021, as per Department of Census and Statistics (DCS).

The overall debt burden also remains high, and with low economic growth, there would be a challenge in internal accruals; thus looking for external assistance would continue.


As per a Reuters report, Sri Lanka has since 2007 accumulated $11.8 billion worth of debt through sovereign bonds (ISB), which makes up the largest part - or 36.4 percent - of its external debt. Asian Development Bank (ADB) has a 14.3 percent share, having lent $4.6 billion. Japan is at 10.9 percent and China at 10.8 percent, with each having lent about $3.5 billion each. The rest of the debt is owed by countries such as India and international agencies including the World Bank and United Nations as per the Reuters.


The country requires US$7 billion in 2022 to various creditors to service its debts, which between now and 2026 will amount to around US$26 billion.


As per Fitch Sri Lankan central bank has to arrange $2.4 billion to assist state-owned and private firms to honour debt obligations in 2022. This is over and above $4.5 billion central government debt.


The country also needs around $20 billion for essential imports such as fuel, food and intermediate goods for exports.


Reserves are said to be at a critical level but have been boosted by $3.1 billion at the end of December by a $1.5 billion yuan currency swap from China as per the Reuters.


In January, India also confirmed a $400 million currency swap with Sri Lanka while deferring another $500 million due for settlement to the Asian Clearing Union (ACU).


Interestingly Sri Lanka is going in for currency swap with countries as Bangladesh for relief, thus underlining diplomacy as a major prop for addressing the debt crisis.


Building Internal Consensus


All this will also require internal political consensus. President Gotabaya Rajapaksa delivered the government’s policy statement in the Parliament on all Government and Opposition parties to unite inside as well as outside of Parliament to overcome the challenge faced by the country while inaugurating the second session of the 9th Parliament on January 18.


The government will also have to adopt a balanced approach to take all parties, communities, and ethnicities together for this to happen this too is a fundamental challenge for the majority Buddhist leaning Rajapaksa government and family.

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