Beyond Chinese debt traps: The crisis in Sri Lanka

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In a recent interview with Bloomberg, Sri Lankan President Gotabaya Rajapaksa observed that China seems to be shifting its ‘strategic focus’ towards South-East Asia and Africa. He alleged that Beijing isn’t giving ‘the same attention’ it did to South Asia, in particular to Sri Lanka and Pakistan, two countries hit by the global debt crisis. Attempts at tapping into a $1.5 billion credit line with China, he further noted, have so far failed.

The interview was widely picked up. In response to Rajapaksa’s remarks, on 8 June China’s Foreign Ministry spokesman, Zhao Lijian said Beijing was ready to “work with relevant countries and international financial institutions” to help Sri Lanka address its difficulties. Though he neither confirmed nor denied whether China would extend further assistance, he expressed hopes that Sri Lanka would “boost its own effort” and “protect the legitimate rights and interests” of its investment partners.

Breaking free

These sentiments were echoed at a meeting between Sri Lanka’s Ambassador to Beijing, Palitha Kohona, and the Director-General of the Department of Asian Affairs of the Chinese Foreign Ministry, Liu Jinsong. In an interview with Global Times, Kohona reiterated his hope that more assistance would flow from China. In response, Jingsong stated that he believed Sri Lanka would engage with China “on the basis of equal consultation and mutual benefits”, breaking free from “Western ideological barriers and sanctions.”

These developments have not gone unnoticed. In response to Beijing’s statements on the country, foreign media is now peddling the latest variation on the debt trap narrative, making it out that while China entrapped Sri Lanka, it has limited itself to vague and evasive statements today, even as the tiny island nation is collapsing to the ground.

Indian media, in particular, has alleged that while New Delhi has kept the island going through a series of credit lines for fuel, food, and medicine, Beijing has satisfied itself with insignificant tranches of humanitarian assistance. Such insinuations are serious, and they have gained credence. Nevertheless, they conceal the bigger picture.

Sri Lanka’s economic woes began well before the present government, though its bungling has contributed significantly to the crisis. Widely touted as an export-dependent economy, the island nation has been heavily reliant on imports. While it made use of traditional aid programmes in the 1980s and 1990s, by the mid-2000s it had graduated to middle-income status. Deprived of access to aid from multilateral agencies, it had no choice but to dip into bond markets to finance its balance of payments deficit.

Failure to industrialise

Narratives that pin China as the sole, or main, cause of the crisis in Sri Lanka thus leave out the fact that, as economic analyst Shiran Illanperuma observes, “Western banks, financial institutions, and hedge funds hold over 40% of the island’s external debt.” The country has so far failed to move away from these sources of funding, a problem linked to its failure to industrialise: since its independence in 1948, Illanperuma observes, it has needlessly been squandering foreign reserves on consumption rather than production.

Debt trap narratives also leave out the fact that Sri Lanka’s tendency to dole out funds for infrastructural projects that have been widely censured is neither recent nor due to Chinese intervention. To give one example, the Gal Oya Irrigation Scheme, funded by the US and located in the country’s Uva Province, came up for much debate when it was completed in the 1940s. No less than the World Bank criticised it for inadequate planning, while one local MP called it “the biggest fraud against this country.” Similar criticisms have been levelled against other schemes, including the Mahaweli Development Project.

More importantly, China’s attitude to the situation in Sri Lanka must be seen in light of a number of geopolitical developments. Prime among them have been the island’s decision to seek IMF assistance last March and the decision to suspend Chinese hybrid energy projects in the Northern Province last December. Such developments have encouraged Western commentators to suggest that the US should make use of Sri Lanka’s crisis to help it pivot to a pro-Western front in the Indo-Pacific. These commentators argue that Washington should call for debt forgiveness for Sri Lanka from US-allied creditors like Japan, which makes up 10 percent of the island’s external debt – ironically equivalent to China’s share.

“There is a lot at stake in resolving Sri Lanka’s debt crisis. The island nation is strategically located in the center of the Indian Ocean, and over 60,000 ships pass close to its territorial waters each year, accounting for over 24 per cent of container traffic in the South Asian region. America and Japan, duly cooperating to create a Free and Open Indo-Pacific (FOIP) strategy, must consider the importance of a stable and economically prosperous Sri Lanka to its larger national security interests.” (Harrison Nugent, The National Interest)

In other words, Western analysts are presenting Sri Lanka’s debt crisis as an opportunity to encircle China, in the Indian Ocean, but also along the Pacific. For China, this is a problem: the Pacific, after all, is its neighbourhood, and relations with countries there have clashed with US designs – vis-à-vis Quad and AUKUS – on the region. South Asia’s debt crisis has only added to the witch’s brew, complicating these matters for Beijing.

China’s response to Sri Lanka and Pakistan should therefore be considered in light of these developments. However, that hardly means, as certain observers contend, that China is abandoning its partners in the subcontinent; as Sri Lanka’s Ambassador clearly noted in his interview, “China has always come to Sri Lanka’s aid in times of need.” There’s no reason to suggest, or to conclude, that things will be different this time.

The writer is an international relations analyst, researcher, and columnist who can be reached at [email protected]

By Uditha Devapriya