Amidst debt troubles, Sri Lanka’s economy and strategy face Chinese pressure

In the South Asian nation of Sri Lanka, an intricate web of economic challenges and strategic maneuvering is currently unfolding. The island nation finds itself caught between a mounting debt crisis and the strategic influence of China, its largest lender. As Sri Lanka grapples with its economic woes, it is also witnessing China's growing presence and influence in the region. 

Sri Lanka officially owes over $50 billion in external debts, and a significant portion, approximately 10%, is owed to China. This staggering debt includes both the official loans and the less visible commercial borrowings from China's commercial banks. As per Sri Lankan think tank, the Advocata Institute, the island nation owes $119 million to the China Development Bank Corporation, $232 million to the China Development Bank and $232 million to the Export-Import Bank of China.

Despite numerous promises from Chinese officials to assist Sri Lanka in restructuring its debts, tangible actions have been elusive. The island nation is in dire need of a lifeline in the form of a $3 billion bailout package from the International Monetary Fund (IMF). While the first installment of aid has been received, the release of the crucial second tranche hinges on China and other bilateral lenders restructuring their debt terms with Sri Lanka.

China initially participated in discussions with other creditors, including India and Japan, offering a two-year moratorium on debt repayments and even exploring the possibility of providing new loans. However, China later altered its stance, creating roadblocks in Sri Lanka's efforts to secure IMF aid.

In an attempt to address the debt restructuring issue, Japan, India, and France formed a committee for negotiations. This committee invited China to participate in the discussions. However, China chose to engage directly with Sri Lanka, assuring that there would be no preferential treatment in the process.

Months have passed since then “nothing has moved concretely within the Japan-India-French creditor committee because of no progress from China,” the Japanese financial daily said quoting diplomatic sources.

While the economic challenges persist, Sri Lanka finds itself in a precarious position, obligated to accommodate Chinese military vessels in its ports. This strategic maneuvering by China raises concerns among regional analysts, who see it as a calculated move to extend influence in the region.

The Yuan Wang 5, one of China’s latest generation space-tracking ships, used to monitor satellite, rocket and intercontinental ballistic missile launches, remained at Hambantota Port from August 16 to August 22. Concern is deepening among strategic thinkers of the region as yet another Chinese vessel Shi Yan 6 is slated to arrive on October 25 to conduct surveys off the Island nation’s waters for the next 17 days after docking at Colombo and Hambantota Ports.

In a recent update, China's Foreign Ministry announced on Tuesday that the Export-Import Bank of China has reached a preliminary agreement with Sri Lanka regarding the resolution of China-related debts. This announcement was made during a routine news conference in Beijing, prompted by a state media inquiry into the nature of Beijing's support for Colombo. Sri Lanka has been actively working on restructuring its foreign debt after suspending repayments in May of the previous year.

Coincidentally, this announcement followed remarks by Sri Lanka's Foreign Minister Ali Sabry, who disclosed that Sri Lanka had granted permission for the Chinese research vessel Shi Yan 6 to dock in the country.

However, the scheduled arrival of another Chinese vessel in Sri Lanka has raised concerns, particularly from India. Last year, the high-tech research ship Yuan Wang-5 made a port call in Sri Lanka, and India has expressed apprehension over the research vessel's capacity to map the ocean bed. This mapping capability is of strategic importance to anti-submarine operations conducted by the Chinese navy.

These developments underscore the complex regional dynamics and the delicate balance between economic cooperation, security interests, and regional geopolitical concerns.

Despite the complexities of Sri Lanka's economic and strategic challenges, there is a glimmer of hope on the horizon. Sri Lankan President Ranil Wickremesinghe is set to attend the 10th-anniversary summit of the Belt and Road Initiative in mid-October. This summit, led by China, is expected to provide a platform for discussions on debt relief and could be a turning point in the ongoing negotiations.

As Sri Lanka treads a fine line between addressing its economic crisis and managing its strategic relationship with China, the outcome of these discussions at the Belt and Road Initiative summit will be closely watched. It may hold the key to alleviating Sri Lanka's economic woes and redefining its complex relationship with its largest lender and strategic partner, China.