SL’s Crisis and Dilemmas of Small States

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Sri Lanka’s problems have less to do with Chinese debt traps than with the inability of small States, lodged between major powers, to pursue a self-reliant foreign policy.

Sri Lanka’s economic woes have not cast a shadow over its complex foreign relations. On 16 August, the Southern Port of Hambantota welcomed the Yuan Wang 5, a research vessel. While Sri Lanka had asked for a deferral of the visit, it later relented and allowed the ship to dock at the Port until 22 August. India, which denied that it put pressure on the island over the issue, nevertheless registered its unease about the visit.

Beijing contends that the vessel was used for research purposes. The Indian media, on the other hand, has described it as a “dual-use spy ship.” The sequel to the drama unfolded a few days after it left the Port, when China’s Ambassador to Colombo, Qi Zhenzong, wrote a rather frank op-ed about the matter. The article accused India and the West of continuing to colonise Sri Lanka. Arguing that Sri Lanka had the right to permit the docking of the vessel, it noted that the Yuan Wang 5 had complied with ‘international practice’.

The article sparked outrage. The Indian High Commission registered its displeasure, accusing the Ambassador of “violating basic diplomatic etiquette”. Western embassies, by contrast, remained silent. Political analysts have observed that the episode may dampen Sri Lanka’s relations with India. Since January, New Delhi has dispensed assistance to the tune of USD 3.8 billion. Colombo’s decision to permit the docking of the Chinese vessel might leave India wondering whether Sri Lanka is pitting the two countries against each other.

Sri Lanka cannot afford to engage in such balancing, yet it cannot avoid it either. Reeling from its worst financial crisis since independence, the USD 84 billion economy is down to its last few million dollars. Although rationing and restrictions on imports have eased the pain somewhat, such policies are not sustainable. The latest spate of import restrictions, which even the Governor of the country’s Central Bank has questioned, bans intermediate capital goods that local industries desperately need. The only tenable solution is a bailout from the IMF, which experts say may take as much as six months.

The truth is that India has emerged as Sri Lanka’s saviour. Simply put, without Indian aid, the economy would have collapsed to the ground. Though commentators compare the situation to the crisis in Lebanon, such comparisons miss the geopolitical angle. Colombo is flanked by two powerful neighbours, one a regional hegemony, the other a rising superpower. Despite the country’s best efforts, these two continue to confront other in the neighbourhood. Such confrontations have played out more to its disadvantage than advantage.

Sri Lanka’s position is also not comparable to Taiwan’s or Ukraine’s. While these are States flanked on one side by a regional powerhouse, rival powers vying for dominance over the region through them, like the United States, the European Union, and NATO, are not located within that powerhouse’s immediate sphere of influence. The situation is different in Sri Lanka, and more complex: so complex, in fact, that the island has no choice but to watch as it gets entangled in one showdown after another between Delhi and Beijing.

Much has been written about Sri Lanka’s dependence on Beijing, India’s assistance to its ailing neighbour, and Colombo’s reticence in siding with what commentators portray as its saviour. Beijing’s reluctance to renegotiate Sri Lanka’s debts has reinforced these narratives. According to this reading, Sri Lanka needs to be more upfront about its foreign policy, which means abandoning its decades-long dalliance with Beijing.

The reality is that its location and economic situation make this an untenable strategy for the island. Sri Lanka can ill-afford antagonising any of its powerful allies, something it found to its cost in early June when the Commercial High Court in Colombo detained a flight over a transaction between a Russian airline and a Irish leasing company.

While the Russian Foreign Ministry immediately condemned the incident, the Sri Lankan Foreign Ministry replied that the government had nothing to do with the detention order. It was a classic Catch-22 situation: the government could not interfere with the order, since it would be seen as an infringement on the judiciary, yet it could not detach itself either, since Russian tourists made up the bulk of arrivals in the country.

The reason for small States like Sri Lanka becoming embroiled in these quagmires isn’t just that they recklessly borrowed money, but that they haven’t been properly encouraged, or directed, to shift to sustainable development strategies, which can enable them to pursue a self-reliant foreign policy. This does not excuse the vanity projects and white elephants that governments in these States have lavished in the name of development. Yet, as Sri Lankan economist Umesh Moramudali has noted, while China was the only lender willing to cough up bucks for Sri Lanka’s post-war development, the Rajapaksa administration also pursued capital markets, issuing its first International Sovereign Bond (ISB) in 2007, the same year Beijing stepped in with a USD 307 million loan for Phase I of the Hambantota Port. Instead of prioritising sustainable growth, successive regimes went on issuing Bonds and racking up external debt.

In focusing attention on China, or for that matter India, foreign policy experts have thus missed the bigger picture. The role of international sovereign debt in economic fallouts has been side-lined. China’s reluctance to forgive Sri Lanka’s debts may stall IMF negotiations, but a more serious setback has been Hamilton Reserve’s decision to sue the country in a US Court and Sri Lanka’s stock of market borrowings, which make up 47 per cent of the total. “Following the global financial crisis,” writes C. P. Chandrasekhar and Jayati Ghosh, “Easy access to foreign liquidity encouraged governments to prime the economy with support from foreign capital, resulting in the stock of external debt rising to exceed US$56 billion in 2020.” Yet these aspects to the crisis have received little attention.

Sri Lanka is the best, and possibly the only, example of a small State flanked by a regional hegemony that in turn courts its most powerful rival as its immediate neighbour. This is a unique position, and the country hasn’t exactly benefited from it. Indeed, in a big way, its crisis is tied to such complexities. A more cohesive analysis of the situation on the ground requires that we consider these complexities heads down. Instead of blaming one side or the other, it is more appropriate to view the problems of small States from the standpoint of those States themselves. A 360-degree perspective is needed. And yet, as far as States like Sri Lanka go, such a perspective remains conspicuously missing.

(Uditha Devapriya is researcher and columnist from Sri Lanka. He is the Chief International Relations Analyst at Factum, an Asia-focused think tank on International Relations, Tech Cooperation, and Strategic Communications based in Sri Lanka.)

By Uditha Devapriya