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Sri Lanka has plunged into an economic crisis following the accumulation of debt running into billions and unprecedented inflation. A lack of foreign currency and a sharp pandemic induced fall in demand in other sectors hastened Sri Lanka’s plunge into the mess. Making matters worse was the mismanagement by the government that has sunk the island nation into major economic and political turmoil.
What explains the chaos that Sri Lanka faces now is what we call a twin deficits economy. The national expenditure is higher than the national income and adding to the misery, imports are higher than exports. To tide over the crisis, Sri Lanka has approached the Asian Development Bank, India, and China for loans. In the meantime, President Gotabaya Rajapaksa has lost his majority and the people in Sri Lanka have taken to the streets in protest as they face fuel shortage and long power cuts with other essentials being in short supply.
Let’s take a look into what precipitated this crisis with a special focus on China.
Foreign Reserve Shortage
Sri Lanka’s foreign reserves have seen a sharp fall of 70% with only $2.31 billion left while the debt to be repaid stands at $4 billion. The island nation now lacks enough foreign reserves to pay for its imports and what makes things worse is Sri Lanka’s dependence on imports to meet its needs for essentials like sugar, pulses, and cereals. The authorities say that Sri Lanka might be staring at a trade deficit of $10 billion this year.
China’s Role
During the early 2000s, Sri Lanka emphasized infrastructure development following the growth model adopted by China hoping that it would create jobs and bring prosperity. China pumped money into Sri Lanka investing as much as $12 billion in Sri Lankan infrastructure between 2006 and 2019. However, there’s a rider. The Colombo Port City project, it’s expected will be completed only in 2043. It means that Ceylon won’t be earning any revenues from the project for two decades and after the project is completed, 43% of the reclaimed land will be given out to China on lease as Sri Lanka has no other way to finance the project.
In the early 2010s, President Mahinda Rajapaksa wanted a port to be built in his home city, Hambantota. Due to its strategic location, China was the only party interested. After Rajapaska’s loss in 2015, the new government seeking to avoid paying back the huge $1 billion debt went for a debt-for-equity swap that leased out the port and the surrounding 15,000 acres to China for 99 years. The international community now feels that it was China’s ploy all along to take over strategic infrastructure projects in the island in a bid to encircle its neighbor and major competitor, India.
Conclusion
The international community must join hands to bail out Sri Lanka. A disturbed Sri Lanka is detrimental to the interests of the US and its allies, especially the QUAD members, India, Japan, and Australia. Sri Lanka being forced into China’s arms to get back on its feet shall have serious consequences on nations in the Indo-Pacific. The alliance of democracies should help Sri Lanka overcome this crisis to prevent Chinese hegemony in the region.
