Lanka’s geopolitical course correction to overcome economic crisis

Just as a drowning man will clutch at a straw, the Sri Lankan government is now seizing upon every avenue that comes it way to tide over an economic crisis which the country has not seen in its post-independence history.  It goes with a begging bowl for currency swaps from India, China, Bangladesh and Qatar.  Each minister has been told to approach a rich country with the task being obtaining aid, loans and currency swaps to increase the foreign reserves. 

Then there are moves to sell prime lands in Colombo and elsewhere and lease out strategic assets such as the Trincomalee oil tank farms.
The oil tank farm lease agreement with India was signed yesterday perhaps as part of a costly concession in return for US$ 500 million credit line and a US$ 1.5 billion currency swap to overcome the dollar crunch which has forced the government to curtail imports – a move that has terribly backfired to give the government more troubles in the form of rising prices and shortages of essential items.

The oil tank farm deal is perhaps a continuation of a recently initiated process aimed at pacifying India even if it meant earning the displeasure of China, which was, not long ago, hailed as Sri Lanka’s all-weather friend.  Sri Lanka’s recent India-friendly moves include the government’s decision to cancel a Northern Province power project which a Chinese company was set to take over.  Then there was for India a policy-change signal in Sri Lankan government’s initial resolve to lock horns with a Chinese organic fertiliser company even after the Chinese embassy took to social media to express its displeasure.  The Sri Lanka government refused to allow the ship to dock at the port and held on to its position citing its quarantine authorities’ findings that the stocks were contaminated with harmful bacteria. However, the government subsequently wilted under pressure and agreed to a multimillion dollar compensation deal which it could hardly afford at a time when the country’s foreign reserves were woefully depleting. 

It appears that these moves have unnerved China, a country that has channelled nearly US$ 15 billion to Sri Lanka through investments, loans and grants. It is against this backdrop that China’s Foreign Minister Wang Yi is making a detour to Sri Lanka on his way home after a tour of Africa.  The Chinese Foreign Ministry announced Wang’s visit to Sri Lanka and the Maldives only on December 30, 2021.

Wang is expected to be here during the weekend. He either carries a stern message or good news of more aid from President Xi Jinping. Or may be both. In any case, the purpose of the visit is to consolidate China’s foothold in Sri Lanka and the Indian Ocean.  It is naïve not to believe that Wang will not express China’s concern over Sri Lanka’s India-pacification moves. Of course, it will be couched in diplomatic language partly polite and partly assertive and, of course, it is a clear interference in the affairs of a sovereign country. But a country neck deep in debt cannot expect to be treated with dignity by a creditor nation. That dignity is inversely proportional to debt is a socio-political reality. However, Sri Lanka by virtue of its strategic location in the Indian Ocean still has what is required to command the world powers’ respect.

Wang’s upcoming visit has some similarity with a diplomatic jolt China delivered to Sri Lanka in May 2019.  This was at a time when Sri Lanka was seen to be drifting away from Beijing’s orbit towards the United States and India. The then President Maithripala Sirisena was invited – read summoned -- to Beijing, ostensibly to participate at the Conference on Asian Civilisation Dialogue. He flew to  Beijing while he was required to be at the helm of affairs as the commander in chief to direct security operations during the volatile period following the April 19 Easter Sunday terror attacks. 

While condemning the terror attacks, Xi reminded Sirisena that China wanted to work with Sri Lanka to push forward the strategic cooperative partnership featuring sincere mutual help and long-term friendship. A Chinese Foreign Ministry statement said that Xi insisted that both sides should maintain regular high-level communication, firmly grasp the general direction of friendly cooperation, and staunchly support each other. “The two countries should steadily advance the joint construction of the Belt and Road Initiative, promote cooperation in major projects, and accelerate livelihood projects to benefit the people of Sri Lanka. Both sides should also deepen security law enforcement cooperation and jointly address non-traditional security threats including terrorism,” the statement said.

Six months after the Sirisena visit, the government changed in Sri Lanka. To say that China was delighted with the Rajapaksas returning to power in 2015 is an understatement.  Large-scale Chinese investment flows resumed. Beijing could not be happier when President Gotabaya Rajapaksa’s government had the diplomatic guts to tell the United States not to bother Sri Lanka with its 450 million dollar Millennium Challenge Corporation largesse.  By cancelling a light rail project, the new government delivered a similar diplomatic snub to Japan, a country which, was until 2005, Sri Lanka’ number one donor. Together with the US, India and Australia, Japan is pushing to streamline a quadrilateral security alliance to check China’s growing military strength in the Indo-Pacific region. 
China remains a staunch supporter of Sri Lanka’s campaign to defeat United Nations Human Rights Council moves to punish Sri Lanka for alleged war crimes. China has also gifted millions of doses of life-saving vaccines to Sri Lanka to overcome the pandemic’s challenges and, ahead of India, provided a US$ 1.5 billion currency swap that shored up Sri Lanka’s foreign reserves to more than 3.1 billion this week.

President Rajapaksa, who once proudly told a visiting high-level Chinese delegation that he had visited China 13 times, had in March last year a phone call from President Xi. During the conversation,  the Chinese leader, while ensuring China’s continued assistance to help Sri Lanka to fight the Covid pandemic, did not fail to stress the need to maintain the strategic cooperation between the two countries.

But now the Sri Lankan government is seen to be making a course correction in its pro-Chia foreign policy. Perhaps it has realised that a more balanced foreign policy approach and a diversification of lending sources are needed to extricate the country from its worst ever economic crisis. But loans whether we get them from China or India will land us in a bigger debt trap that would require us to sell or lease out our national assets on a long-term basis.  Setting debt traps and achieving national interest goals is part of big power geopolitics and geo-economics. 
On the other hand, the government also has the option of going to the International Monetary Fund which has many a time in the past helped Sri Lanka to overcome economic crises. But the government fears the IMF prescriptions will require taking unpopular measures which in turn will lead to its downfall.  But isn’t it a better option when the debt trap means selling the country’s assets?