India ‘takes control’ of SL’s economic crisis

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China faces troubled times following Pakistani Prime Minister Imran Khan’s ouster through a No-Faith Motion, Nepal’s ratification of the Millennium Challenge Corporation (MCC) grant in February 2022, despite China’s opposition, Russia’s war on Ukraine, and Sri Lanka’s massive economic crisis. All of these have put a strain on China’s ambitious Belt and Road Initiative (BRI) and reliance on China appears to be dwindling. India’s support for the present system, in order to win an IMF loan, may expose China to further risks if the IMF imposes requirements that are detrimental to China’s interests.

To set its stance in the current crisis in Sri Lanka, Chinese Envoy to Sri Lanka
Qi Zhenhong on Thursday (21) said Beijing is closely monitoring the ongoing situation in Sri Lanka. Ambassador
Qi assured that the Chinese Government would continue extending assistance to Sri Lanka in every possible way including direct Chinese Government support, regional Government support and support through Red Cross China.

But China’s BRI is at a crossroad in the wake of the Pakistan’s Prime Minister Imran Khan, a staunch supporter of China’s BRI and who was entangled in an internal political game (suspected to have an international connection too) being finally ousted in style amidst his supporters screaming that it was meticulously crafted.

The China-Pakistan Economic Corridor (CPEC) was considered as a framework for regional connectivity, and both countries have stated that CPEC will benefit China and Pakistan while also benefiting Iran, Afghanistan, the Central Asian Republic, and the region. Because India was absent from the entire powerful roadmap of CPEC and the BRI, there were attempts to isolate China in the same way China tried, and seemingly India is currently ‘succeeding’.

Many suspect that Khan’s recent visit to Russia was part of a ‘foreign agenda’, and that he had also fallen out with the Pakistan military, who had been scheming in the last year or so to oust him. Russia’s conflict with Ukraine has also jeopardised China’s new energy agreements with Russia. Russia’s importance in the BRI is enormous but the war on Ukraine has impacted China’s land-based connectivity with the EU.

The other countries, such as Nepal and Bangladesh, financial status quo is trembling too and this set of countries, including Sri Lanka, have embraced China’s BRI. Nepal, against China’s ‘wish’ signed the US MCC which several ‘intellectuals’ in Sri Lanka categorically rejected, citing it would infringe the sovereignty of the country.

China’s presence in Sri Lanka at risk?

China’s fate on Sri Lankan soil is identical, with the economically -beleaguered country entirely placing its confidence in India to bail it out from the debt and dollar crises. China’s silence on not servicing Sri Lanka in the current crisis or on the plea to restructure the debt repayment remains.     

When India took over three solar hybrid power projects in Sri Lanka’s Northern Province, which would be built on three islands, it was a major setback for China. It was beginning of the end for China.

The hybrid solar project was granted to China through an open bidding, but during former Finance Minister Basil Rajapaksa’s visit to New Delhi, he cancelled it and inked a Memorandum of Understanding with India. India has stated that if those projects are handled by China, it would be a major threat to their national security. India’s loss in the battle to acquire the East Container Terminal at Colombo’s port and regaining the three islands’ hybrid renewable energy project, was one classic example how India’s bureaucracy works.  

China’s position in Sri Lanka is significantly more significant than most people realise. They contributed to the development boom, but the land supplied on lease in exchange for non-payment of loans and interest, as well as the fact that several of their mega projects did not create the expected revenue, became an international topic of the 21st Century. It was overly hurt by what was going in their backyard.

Due to ongoing demonstrations, political upheavals, financial breakdown, and dollar currency and petroleum crises, the BRI’s future is currently in jeopardy. The currency crisis has severely hampered port trade, importers, and exporters, and the tourism industry is no exception. However, the current money printing trend, dollar loans from India, as well as certain currency exchanges with China, India, and Bangladesh, have ‘reduced’ tensions in this sector.

However, since this Government took office, there have been no signs of investors flocking to Sri Lanka. The Covid-19 outbreak may have been a factor, but political culture, die-hard nationalism projected at every turn, protests, and issues related to ethnic minorities, have all contributed to the lack of investor interest. China was allocated 116 hectares of reclaimed property in the Port City, but it is still vacant for businesses. According to sources, port city developers CHEC Port City Colombo (Pvt) Ltd. organised promotional roadshows in a number of countries in order to drum up business. Several prominent billionaires from the West have also visited the port city, but none have made any commitments as of yet.

India’s second coming

While China senses a risk in the region, India has made a strong recovery. China’s has been outsmarted in the race with India and America by their strategic preparation. As members of the Quad, India and America have only sided with the incumbent Government, risking severe retaliation from the demonstraters who have been on the streets at Galle Face for the past 15 days (as of April 23).

The public has been watching India’s eagerness to ‘assist’ Sri Lanka in its current situation. They have already pledged another USD 2 billion loan for Sri Lanka in addition to USD 2.5 billion that is already signed off.

But, the best of the bunch was India’s Union Minister for Finance and Corporate Affairs Nirmala Sitharaman, whose visit to the International Monetary Fund (IMF) in Washington, D.C. ‘coincided’ with a Sri Lankan contingent of financial experts, led by Finance Minister Ali Sabry, at the same venue on 18 April. India was key in recommending Sri Lanka for the IMF loan.

The IMF bailout push by Sitharaman and her delegation comes in the wake that it can also impact China’s development goals. It can be speculated that the IMF could push Sri Lanka to adhere to policies that would curtail the island nation obtaining financial support in the form of loans from other countries, including China. There can be shakeups in the
Sino-Lanka Free Trade Agreement that the Government is hoping to sign and has announced recently that they are ‘working’ on it.

Sitharman held a bilateral meeting with Georgieva on the sidelines of the International Monetary Fund-World Bank (IMF-WB) Spring Meetings in Washington, D.C. and met Minister Sabry. It would be doubtful whether Sri Lanka would be able to even obtain the targeted USD 3-4 billion bailout without India’s backing or whatever the sum, that would be finally offered. Reuters quoted Sri Lanka Mission Chief Masahiro Nozaki as saying, “An IMF-supported programme should be designed to resolve Sri Lanka’s acute balance of payments problems and put the economy back on a sustainable growth path as early as possible.”

Interestingly, even (IMF) Managing Director Kristalina Georgieva made reference to the help India is providing Sri Lanka during its economic crisis. Sitharaman said the IMF should support and urgently provide financial assistance to Sri Lanka and assured the Finance Minister that the IMF would continue to actively engage with Sri Lanka, according to the Indian Ministry of Finance website.

However, Sri Lanka is expected to play a convincing game with the IMF because of current debt payment and forex loss.

The Minister of Finance has made a request for a Rapid Financing Instrument (RFI) with the IMF and the IMF has subsequently informed Minister Sabry that India had also made representations on behalf of Sri Lanka for an RFI. It had been communicated that IMF will consider the special request made, despite it being outside the standard circumstances for the issuance of an RFI. The Indian Finance Minister also assured India’s fullest support to Sri Lanka to move forward and has emphasised India’s commitment to strengthen the development of the economy in Sri Lanka and building stronger bonds between the two nations as they move forward together.

China’s new help submerged in Indian-Sri Lanka diplomacy

China which took lead up and until its Envoy in Sri Lanka, Qi Zhenhong, had visited the Northern Province. But, thereafter it eroded when India took over the financial crisis situation of Sri Lanka. On Thursday (21) China announced that China International Development Cooperation Agency (CIDCA) has pledged an urgent emergency humanitarian aid of RMB 200 million to Sri Lanka, including 5,000 tonnes of rice (with the previously announced 2,000 tonnes), pharmaceuticals, production materials and other essentials. Furthermore, the Yunnan Province has announced a donation of RMB 1.5 million worth of food packages to Sri Lanka. 

Foreign Minister Prof. G. L. Peiris also apprised the Chinese Ambassador of the current situation in the country and the shortage of energy which has adversely affected the economy of Sri Lanka. He briefed the Ambassador on the measures which are being put in place by the Government to immediately overcome the prevailing situation, including the ongoing discussion with the IMF for financial assistance as well as reformulating Sri Lanka’s debt and in that context Minister Peiris requested further assistance from China, particularly in the field of bridging finance during a difficult time.

Sri Lanka crisis and India’s help

But, the fact remains that China has slowed down in the wake of the Rajapaksas with whom China had a great relationship in promoting the BRI. Yet, the leaderships of Sri Lanka and the China have been criticised for alleged corruptions. The ongoing protests in the country carry slogans of the corrupt deals China had made when the Rajapaksas were in power.

These matters all paved the way for India to take control of the crisis situation of Sri Lanka. India is feeding Sri Lanka at a time of crisis, if put in a nutshell. In addition to backing Sri Lanka at the IMF and another new USD 2 billion loan plan, India has also sent a consignment of 11,000 MT rice, which arrived last week, under the previous USD 1 billion concessional Indian Credit Facility, and it was ceremonially handed over to the Sri Lankan Government by officials from the Indian High Commission. In addition to the consignment, the Credit Facility had received 5,000 MT of rice previously. With this, the Indian State Trading Corporation has delivered 16,000 MT of rice out of a total of 40,000 MT that will be imported from India.

With the visit of Basil Rajapaska, a wide range of bilateral agreements were also signed. These latest bilateral ties are vital for India as well. The Maritime Rescue Coordination Centre, Cooperation in the Development of Fisheries Harbours in Sri Lanka, the MoU for the establishment of Modern Computer Labs and Smart Boards with Customised Curriculum Software in 200 Galle District Schools; and MoU between Sushma Swaraj Institute of Foreign Service and Bandaranaike International Diplomatic Training Institute were some of the top agreements signed after taking over the West Container Terminal last year.

The Indo-Pacific collaboration between the United States and India has grown stronger. India will help the United States’ objective to establish a free and open Indo-Pacific order while weakening China’s military capability. India’s dealings with Sri Lanka send a clear indication that it intends to displace China here as well and the financial crisis has helped India to achieve its goal and be the dear big brother of Sri Lanka. China’s next move may change now to reclaim its place, and Sri Lankans will always be mere bystanders in the China-India tit-for-tat diplomacy fight over the Indian Ocean’s pearl.

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By Sulochana Ramiah Mohan