China’s Increasing Sri Lanka Influence Affects India

By Lakshman I.Keerthisinghe | Published: 2:00 AM Oct 13 2021
Columns China’s Increasing Sri Lanka Influence Affects India

By Lakshman I.Keerthisinghe

“Sustainable development is the pathway to the future we want for all. It offers a framework to generate economic growth, achieve social justice, exercise environmental stewardship and strengthen governance”

Ban-Ki-moon- Former UN Secretary General  

In the past decade and a half, Chinese engagement with neighbouring countries of India has increased by multiples. China uses different financial and non-financial instruments to facilitate its engagement. As the Pacific Ocean’s strategic rivalries intensify, a new multilateral grouping has emerged in the Indian Ocean, and its ripples are likely to be felt in the South China Sea. 

Colombo Security Conclave – including India, Sri Lanka and the Maldives, emphasised “four pillars” of cooperation, including marine security, terrorism, human trafficking and cyber security. 

The group was formed in 2011 and it is now poised to expand its full-time membership to Bangladesh, Seychelles and Mauritius, which currently hold observer status. Experts said the decision to welcome the three new members reflected India’s growing ambitions in the region and its wariness of China’s attempts to cultivate similar partnerships. 

“It is very clear, India’s rationale behind pushing the expansion is China,” said Rajeswari Pillai Rajagopalan, the Director of the Centre for Security, Strategy and Technology at the New Delhi-based Observer Research Foundation. “If China wasn’t active in the Indian Ocean and wasn’t sending warships inside India’s exclusive economic zone, India would not have been so proactive on the grouping.” 

China has been expanding its presence in the region, establishing a military base in Djibouti, operating the Gwadar Port in Pakistan and the Hambantota Port in Sri Lanka.

 In May, Kenya inaugurated a Chinesebuilt port on its Indian Ocean island of Lamu, while the Tanzanian Government indicated it planned to revive a US$10 billion deal with China to build a new port in the coastal town of Bagamoyo. Chinese military observers have speculated the People’s Liberation Army Navy could eventually raise a special naval fleet for the Indian Ocean.

 It is seen that the Belt and Road Initiative (BRI) is one mega vehicle China uses to engage. Foreign Direct Investment (FDI), trading partnerships, using its lending capacity to lend for major infrastructure projects, military assistance and in some instances providing diplomatic cover at international forums. 

‘‘Our country is facing a severe foreign exchange crisis. Data from the Central Bank shows that the country’s net foreign exchange reserves are close to zero, which means almost all of its reserves are borrowed.” – This statement to Parliament by Basil Rajapaksa, the Finance Minister, on 7 September, amplifies the dire situation of the Sri Lankan economy. In a recent report, Bloomberg stated “Sri Lanka’s risk premium for a default jumped, reflecting concern that the pandemic is damaging the nation’s ability to fill its foreignexchange coffers.

 Early in August, the one-year default probability was at 27.9 per cent, the steepest in Asia, up from around 13 per cent over six months ago, according to a Bloomberg model where a reading above 1.5 per cent signifies high risk of failure to pay. 

The foreign currency reserves stood at USD 2.8B at the end of July and at USD 3.55B at the end of August. Last month, then State Minister and currently the Governor of Central Bank of Sri Lanka, Ajith Nivard Cabraal, listed potential inflows over the next 3 months, which amounts to nearly USD 2,650M as follows:*SWAP from India – USD 400M,SWAP from Bangladesh – USD 250M,.*Loan from China Development Bank – USD 300m,*Special Drawing Rights allocation from the IMF – USD 800M.*Central Bank purchases from the Forex market in the next 3 months – USD 200M. 

Inflow from ISBs held by local banks – USD 300M.*Expected inflows from the utilisation of under-utilised assets – USD 400M. The Central Bank has also negotiated a SWAP with the People’s Bank of China of a sum of USD 1500M, which too, can be accessed and hence could be included as a part of its effective reserves, he added. These weak economic indicators have led to a near 10 per cent depreciation of the Sri Lankan rupee against the US dollar over the past one year, making imports more expensive. Most banks have run out of dollars to finance imports.

 Lanka has to repay about $2 billion in foreign debts before the end of the year. In conclusion, in the past decade China has been the largest foreign investor in Sri Lanka In the past 24 months China has become the top import partner of Sri Lanka, surpassing India – (in 2020 China $3.58B vs India $3.01B) China has been the second-largest foreign lender for Sri Lanka during the last decade. 

Nevertheless, Sri Lanka exported $654.44M worth of goods and services to India compared to only $252.00M worth to China. Sri Lanka should endeavour to gain support from all possible sources without joining camps in these difficult times as that would become problematic. 

The writer is an Attorney-at-Law with LLB, LLM, MPhil. (Colombo)- [email protected] 

By Lakshman I.Keerthisinghe | Published: 2:00 AM Oct 13 2021

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