There is no mistaking the fact that China is doing everything possible to upstage India in relations with Sri Lanka and to pursue its goal of ruling the seas. Having ensured a strong footprint in Pakistan through the impending China-Pakistan Economic Corridor (CPEC) to gain unhampered access to Gwadar port which would considerably reduce the distance from China to the sea lanes for purposes of trade, the wily Chinese are now looking hard at Sri Lanka, seeking to exploit Colombo’s economic troubles and to gain a foothold through stakes in their key port.
Simultaneously, talks are underway with Bangladesh to build a road on the lines of CPEC with liberal baits in the shape of infrastructural development. With India too wooing Sri Lanka aggressively to offset Chinese influence, the going is good for the Lankans at least for now. While India is one of the top four investors in Sri Lanka, with cumulative investments of over US$1 billion since 2003, China is the largest investor by far with nearly US$15 billion in funding and investment in 2016 alone.
Much of the government and private investment by China is in major infrastructure projects — especially ports and airports. China’s interest in Sri Lanka is largely attributable to its strategic location on the route of China’s Belt and Road Initiative. In the past few weeks, Prime Minister Narendra Modi has met his Sri Lankan counterpart Ranil Wickremesinghe in New Delhi and, more recently, in Colombo. At the New Delhi meeting they sought to consolidate a growing economic partnership, signing a memorandum of understanding on future cooperation, which provides a framework for Indian investment in infrastructure projects on the island.
Modi’s subsequent visit to Colombo, the second since he became prime minister in 2014, reflected what New Delhi officials have described as “qualitative transformation” in bilateral ties. They hope the upturn in relations will help to loosen Beijing’s hold on their southern neighbour. China’s flagship projects in Sri Lanka are the Hambantota Port Development and the Colombo Port Project, both located at strategic points in global sea trade. Large projects like these make it easier for Beijing to draw Sri Lanka into its 21st Century Maritime Silk Road project — part of the Belt and Road Initiative.
Chinese loans – with which much of the investment has been financed – have contributed to the country’s huge national debt of $64 billion, or 76 percent of GDP. After coming to power, President Sirisena suspended projects initiated by his predecessor Rajapaksa that he said were badly priced and financed on onerous terms. But eventually, with the country’s economic crisis worsening, he allowed them to go ahead. In the last couple of years India has focused on countering the growing presence of China in Sri Lanka by developing infrastructure. This is an effective response to the Chinese strategy.
He asked China to resume work on the $1.4 billion Colombo Port project in October, although a deal to increase the commercial viability of the loss-making Hambantota facility and also help Sri Lanka generate much needed funds was kept on hold. Notwithstanding Sri Lankan reservations over Chinese investment, Colombo is keen to keep China on board. Wickremesinghe attended a major OBOR (One Belt One Road) summit in Beijing recently and aims to finalize a free trade agreement (FTA) with China this year. But, as the recent talks with Modi show, Sirisena also wants to prop up relations with India, which were under strain in the Rajapaksa era. This month, Sri Lanka turned down a request by China to allow one of its submarines to dock in Colombo, concerned that this might alarm its neighbour.
For India, Trincomalee and other planned investments – which include power plants, railway line upgrades, and the creation of special economic zones – have a strong strategic value. New Delhi appears to be determined to check China’s geopolitical ambitions in South Asia. This it is seeking to do by developing a bigger economic footprint in Sri Lanka. The Lankans clearly sees benefit from cultivating ties with both countries as a means of transforming the island into a regional commercial hub. But it would be a tightrope walk that will not be easy especially because it has to contend also with domestic concerns over economic colonization.
As Sri Lanka handed over majority stake in the Hambantota port to a Chinese firm for 99 years in a ‘debt-equity’ swap of $1.1 billion, India hopes that the security assurances inserted in the concession agreement hold fast in the future. However, fears remain about the precedent set by this ‘distress sale’ for other Chinese projects in the neighbourhood. For now, India remains the biggest trading partner for Sri Lanka, with bilateral trade in 2016 amounting to $4.38 billion. In development assistance, India has committed over $2.6 billion in loans and grants. But the way the Chinese are aggressively wooing Sri Lanka, they may try to gain a psychological advantage in this too.
The Sri Lankan government has admitted that the country is trapped in a “gigantic debt trap” mainly due to loans taken by the Rajapaksa government. Sri Lanka has entered a into three-year IMF loan programme for $1.5 billion, but that may not be enough to achieve the vision of a debt-free nation by 2020. The total outstanding external debt was $25.61 billion in April 2017. So far, Sri Lanka has disbursed around $713.4 million to service its foreign debt. This year, Sri Lanka will have to pay back around $2.42 billion, which will increase to $2.56 billion in 2018.
The author is a political commentator and columnist.
He has authored four books.