As if losing a half a billion in Greenback is a crowning achievement. That is what the interlocutors of this government are saying after Sri Lanka managed to lose $ 480 million Millennium Challenge Corporation (MCC) Grant after the board of directors of Washington based US government agency last week decided to discontinue the Compact with Sri Lanka due to “Lack of partner country engagement.”

G.L. Pieris, the Minister of Education is quoted as telling this newspaper: “As promised by the President during his election campaign, the Government is not in a status of signing the Millennium Challenge Corporation (MCC) agreement. The President spoke about a direct policy which is being implemented to save the country.”
“We know that the people of some of the signatory countries who have signed the MCC agreement had become workers. With that risk, the President mentioned the reason as to why he would not sign the MCC.”
This is humbug, but the damage is done.

The five-year compact originally consisted of two projects: A $ 350 million transport project to upgrade physical roadway networks and modernize traffic systems; and $67 million land project to expand and improve existing Government of Sri Lanka initiatives to increase the availability of spatial data and Land Rights information.
Why Sri Lanka turned down a grant of Rs 89 billion, at the same time, while it is pleading for debt relief and is negotiating with China for financial life support cannot be explained in a rational sense. 

Except for the fact that popular irrationality that the government had fostered is now making itself into State policy. This government has benefitted from the wave of popular irrationality, with a degree of ethno-nationalist bent.
It cultivated and promoted a good part of that discourse, which was in turn behind its electoral success. The private television networks owned by the government-affiliated businessmen are actively promoting it. That is a sad indictment for the country, its leaders and people.

The Sri Lankan economy is in deep trouble and many analysts expect it to default. 

The government debt to GDP ratio was 86.8 per cent at the end of 2019, increasing from 83.7 per cent at the end of 2018, according to the Central Bank annual reports. According to Citi research, the situation is much worse. It reckons that Sri Lanka’s debt stock is about 102.5% of GDP in August 2020 if guaranteed debt and obligations to the IMF are included.

 The government has to spend $ 4-5 billion annually for the next five years to service foreign debt. With the international credit rating agencies have downgraded the country’s sovereign bonds to junk, the prospect of sovereign default looms large, though the government keeps reassuring that it would pay up. 

The MCC grant would not have done much to alleviate the deep-rooted debt problem, but it could have alleviated to a lesser degree the pressure on the treasury in terms of infrastructure investment. Somewhere down the line, do not be surprised if the government takes another Chinese loan to upgrade the Colombo city transport, that the good part of the MCC compact was intended to invest in.

The MCC compact is one costly victim of conspiracy theories and short term political calculations. While most political parties that actively promote conspiracy theories while in opposition get their act straight when in power, this government has proved to be an outlier. After the incumbent Gotabaya Rajapaksa was elected the President, he appointed a four-member committee led by Colombo University economics don Lalithasiri Gunaruwan to examine the MCC compact.

The committee produced, at best, a half-baked report, which saw goblins in every corner, parroted conspiracy theories dutifully (Citing contested academic opinion and works of a lesser-known Sri Lankan association in Australia called SPUR about land rights, i.e. land titles granted to farmers made it easier for companies to buy land), twisted facts (As to why MCC was discontinued in countries like Madagascar, Honduras. The reason being the legitimate governments there were toppled by military coups) and misrepresented them (As to the sovereign concerns of MCC’s scrutiny over how its funds are spent).

Why that report was not called bluff was, it was written in the vernacular!

It is hard to believe that the government took it seriously. However, the government was a victim of its own making. Gotabaya Rajapaksa, who might have noticed not just the economic cost, but also the long term political cost of snubbing the MCC, could not still rein in the beast his government unleashed.

He just sat on the MCC compact, until Washington though enough is enough and terminated the agreement.
Partly why the government has been rather muffed in its reaction to the termination on the compact was that it did not see it coming. With the right timing, it might have gone with the MCC with at best the cursory changes. 
By snubbing the MCC and getting snapped by its board of directors, the government has not only sacrificed $ half a billion for its short term political glory. It also snubbed an opportunity to work closely with Washington and cultivate a long term partnership. There will be long term consequences. As the Sunday Times reported the United States is planning to co-sponsor a country-specific resolution on Sri Lanka at the UN Human Rights Council in March next year.

That, of course, is not directly related to the MCC, but to the government’s withdrawal from the previous UN Human Rights Council resolution that it co-sponsored with the USA. Again, despite the usual conspiracy theories, the Sri Lankan co-sponsorship of the resolution effectively subdued an adverse global campaign against Sri Lanka, though the progress of Yahapalanaya in terms of issues related to the final phase of the war had been nominal at best. It nonetheless faired a lot better in overall strengthening of the democracy and democratic institutions. It was these institutions that muffled the international response to the current administration so far, though that phase seems to be coming to an end.

This government claims that it follows an equidistant foreign policy, a policy of neutrality in great power competition. However, its foreign policy choices are in fact self alienating Sri Lanka from the Western democracies. Start with the USA, the rest of the West would follow. This would further deepen Sri Lanka’s dependency on China. The entire game plan of the government to avoid a default itself is based on the potential Chinese investments to the Colombo Port City and the Hambantota Economic Zone, both are undertaken and a majority stake of which is owned by China’s State-Owned Enterprises.

 The State Minister of Money and Capital Market Ajith Nivard Cabraal tweeted recently: “Growing Investment pipeline is encouraging. Shandong Tyre-$300m: Kalutara tyre factory-$600m: CHEC/Browns Mixed development-$450m: Chinese #government commitment to @PortCityColombo $1,000 m. Doomsayers, take note!“

Cabraal also said in the Annual Asia Securities Investment Conference that Sri Lanka targets $2.5 billion worth of Foreign Direct Investments (FDI) in 2021 backed by committed investments from Chinese firms.
In fact, China remains the only financial lifeline. In March, Sri Lanka obtained a $ 500 million loan from China and has since been negotiating a $ 700 million syndicated loan.

FDI from any country should be welcomed and actively promoted, that this government is at leasing promoting Chinese investments is better than nothing- which was the hallmark of the Yahapalanaya’s passivity. However, this administration has failed to create a level playing field for other countries and non-Chinese firms. The diversification of foreign relations and FDIs should be the commonsense strategy. MCC offered a starting point for cooperation with America and Sri Lanka snubbed it. 

Long term implications of this flawed approach are that Sri Lanka cannot escape destiny as an outpost of China’s economic power. And there will be geopolitical consequences.

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