Sino-Lankan relations at crossroads

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Relations between Sri Lanka and China, long believed to be iron-clad, being based on mutual interest and cooperation, have come under strain lately. The relationship is at the cross roads, calling for mutual understanding and deft diplomacy to put it back on track.

The three points of friction are (1) Sri Lanka’s approaching rival India, the West and institutions like the IMF, to save it from economic collapse caused by a severe foreign exchange shortage, (2) Sri Lanka’s reluctance to accede to China’s request to sign a Free Trade Agreement, (3) A possible strengthening of security relations with India and the West, opening the door to partnership in the anti-China Indo-Pacific defense scheme.

The Chinese Ambassador in Sri Lanka, Qi Zhenhong, has said that China is keenly watching the Lanka-IMF negotiations. The scheme emerging from the talks will determine the future of Sino-Lankan relations, he cautioned. If the IMF prescribes that Sri Lanka should scale down or be wary about Chinese loans and projects, and Sri Lanka abides by such advice, Sino-Lankan cooperation will be affected, he warned.

China’s fear about the IMF-Lanka talks stems from the fact that the IMF’s mission chief in Sri Lanka, Masahiro Nozaki, had told Reuters that the IMF is expecting Sri Lanka to restructure its foreign debt including that owed to China. The singling out of China is seen by Beijing as significant because it accords with the Western narrative that China has put Sri Lanka in a ‘debt trap’ (even though China accounts for only 10.5% of the Sri Lanka’s external debt of US$ 51 billion).  

There is disquiet in Beijing about the massive Indian effort to help Sri Lanka materially and financially. Indian aid could cross US$ 2.5 billion. India is helping Sri Lanka get IMF assistance even by suggesting that it be treated as a low income country for the time being. To Beijing all this is a scheme to influence economic decision-making in Sri Lanka to boost India’s geo-political interests vis-à-vis China.

But China may have brought all this upon itself. When the Sri Lankan President Gotabaya Rajapaksa requested the visiting Chinese Foreign Minister Wang Yi to reschedule Chinese debt repayment, Wang said that China has no system of rescheduling loan repayments and that Sri Lanka could not be made an exception. He advised Sri Lanka to borrow prudently. Recently Ambassador Qi said that China and Sri Lanka are discussing re-scheduling of loans, but added that Sri Lanka should strive for ‘self-sustainability’. China has clearly failed to realise Sri Lanka’s desperation.  

When the economic crisis in Sri Lanka worsened and India had rescheduled repayment, China offered a loan of US$ 1 billion to repay old loans to it and US$ 1.5 billion as buyer’s credit. But the promised money is yet to come. Perhaps it will depend on the outcome of Lanka’s talks with the IMF.

Ambassador Qi openly voiced dismay about Sri Lanka’s alleged lack of gratitude for China’s substantial investments in infrastructure in the island. He complained that Sri Lanka still owed US$ 390 million to Petro China. Perhaps alluding to Sri Lanka’s cancelling a US$ 2 million Chinese hybrid power project on three North Lankan islands at India’s instance, Qi said that Sri Lanka should grant projects on non-political grounds. India had objected to that project on the grounds that Chinese presence so close to the Indian shore would be a security risk. India is wary about Chinese intrusions in North Lanka, which it considers its backyard.   

The Chinese Premier, Li Keqiang, told his Sri Lankan counterpart Mahinda Rajapaksa on 22 April, that while China has empathy for Sri Lanka’s economic plight and is keen on helping it, there ought to be “an early start of the negotiation and signing of the Free Trade Agreement, so as to enhance mutually beneficial cooperation.”

But Sri Lanka has been dragging its feet on this issue since 2015 as it fears that the Lankan market will be flooded with Chinese goods while Sri Lanka will be unable to push its goods into the Chinese market. When the talks broke down in 2017, the issue was Beijing’s rejecting Colombo’s demand for a review of the FTA after 10 years. But according to EconomyNext, the real issue was opposition from the entrenched Lankan monopolists who feared foreign competition. China wanted zero tariffs on 90% of the goods sold to each other as soon as the FTA was signed but Sri Lanka wanted it to start with zero tariffs on only half of the products concerned and expand the list gradually over 20 years.

A 2015 report of the Institute of Policy Studies points out that Sri Lanka had a comparative advantage vis-à-vis the world, in 566 products, out of which, it exported 243 items to China. There were an additional 299 products with trading potential vis-à-vis China. Sri Lanka can push for a place in the Chinese market for vegetable products, rubber and plastics, the report said.

In January 2022, the visiting Chinese Foreign Minister Wang Yi, signaled China’s desire to resume the stalled FTA talks. But it fell on deaf ears. More recently, the Chinese Prime Minister Li Keqiang told his Lankan counterpart, Mahinda Rajapaksa, that China sees an early conclusion of the FTA as being conducive for the growth of Sino-Lankan ties, and Ambassador Qi said that the FTA would benefit Sri Lanka. 

Prime Minister Mahinda Rajapaksa assured Premier Li that his government will work on the FTA. According to the latest information, a Sri Lankan Government committee has started work on the FTA.

Sri Lanka has a lot of tight rope walking to do. On the one hand, India and the West are putting pressure on it to go slow on Chinese loans on the grounds that these could land it in unsustainable debt. On the other hand, it is China which has the deeper pocket, and in the Lankan view, a better record in project delivery. Both have the means to enforce their will.

By P.K. Balachandran