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Politics & Security

Sri Lanka’s Economic Crisis Leads to Strategic Gains for Beijing

Ignoring Sri Lanka’s pleas for loan rescheduling, China offers aid that would increase the island nation’s problems and Beijing’s control of its strategic port.

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Workers walk past hoardings for the Colombo Port City, developed by China Harbour Engineering Co., a unit of China Communications Construction Co., in Colombo, Sri Lanka, on Friday, March 30, 2018. The project is one of several in Sri Lanka that offer lessons for countries looking to snag some of the more than $500 billion projected to underpin Chinese PresidentXi Jinping痴 Belt and Road infrastructure initiative.Photographer: Atul Loke/Bloomberg.

China, quite expectedly, is piercing through Sri Lanka’s unprecedented economic crisis that has plunged the island nation into bankruptcy. Playing the role of a sharp moneylender, on April 22, China announced an “urgent emergency humanitarian aid” package of 200 million RMB ($31 million USD) to Sri Lanka, extended through the China International Development Cooperation Agency (CIDCA). 

Furthermore, China’s Yunnan Province has announced a donation of 1.5 million RMB ($230,000 USD) worth of food packages to Sri Lanka.

Notwithstanding this humanitarian aid, China has maintained conspicuous silence on Sri Lanka’s pleas for debt rescheduling. Although Chinese Ambassador to Colombo, Qi Zhenhong, made a statement in March, that Beijing was considering a $2.5 billion USD credit facility to Sri Lanka, nothing official has come of it. 

On the contrary, there are reports that Beijing has communicated its reservations about debt deferment to Colombo, saying there is no such provision in their financial system. 

Pleas for Debt Rescheduling Meet Silence

Instead, it was communicated that Beijing could “consider providing further loans to repay debt” with stricter conditions, rather than rescheduling the existing debt. 

Sensing an existential vacuum in Colombo, Beijing is swooping in to further cripple Sri Lanka economically. The proposed steps would  render the island nation politically ー and militarily ー subordinate to Beijing. 

After all, Chinese projects and loans often are directed towards resource-rich or strategically-placed countries, 70 percent of which do not have a good credit rating, or any rating at all. Sri Lanka, a small strategically-located island nation in the heart of South Asia and the Indian Ocean Region, remains such a case in point. Beijing’s offer would end up rendering Colombo far more vulnerable to the former’s apparent debt-trap.

The case of Sri Lanka and its economic collapse is attributed in large part to its unsustainable debt, along with white elephant infrastructure projects undertaken via massive loans from China. This shall soon become a reference case-in-point for small, underdeveloped countries across the Indian Ocean Region, Africa, the Caribbean, the Pacific Island nations, Latin America, the North Atlantic, and Eastern Europe. 

People shout slogans against Sri Lanka’s President Gotabaya Rajapaksa during a protest in front of the Presidential Secretariat, amid the country’s economic crisis, in Colombo, Sri Lanka, April 9, 2022. REUTERS/Dinuka Liyanawatte

Debt Trap Diplomacy

According to a study by the AidData research lab, Chinese loans account for 65 percent of bilateral debt across the above-mentioned regions.

Interestingly, Beijing appears to have been caught in its own web. It does appear keen to make Sri Lanka the reference point of any special bailout package. Beijing is apprehensive that many other smaller nations who have fallen prey to Chinese debt-trap with huge loans and projects along the Belt and Road Initiative route shall begin expecting similar concessions. 

Nations such as the above have been on the lookout for alternative sources of external finance. While issuing massive loans, China often protects its interests by holding project assets as collateral, having taken over quite a few. 

In many cases, Chinese lending is followed by asset-grab. The opacity surrounding Chinese debt is typical, given its consistent history of hiding loans as trade credits or routing them through special purpose vehicles. This recurring phenomenon is referred to as “debt-trap diplomacy.”

RELATED: Sri Lanka and The Danger from China’s Debt Traps

A nuclear-powered Type 094A Jin-class ballistic missile submarine of the Chinese PLA Navy in the South China Sea. REUTERS/Stringer

Links to Chinese Expansionism

Given Beijing’s heavy-handed debt diplomacy, it needs to be checked for its expansionism that spreads across small, lesser-developed nations in dire need of developmental aid and assistance. With most of these nations, the balance of trade is despairingly tilted in China’s favor, facilitating the nation’s descent into Beijing’s debt-trap, and aiding Beijing’s influence in the maritime realm around that particular region. 

This should be a cause for concern for regional stakeholders, as well as prominent Asian players with growing roles and presence in the region, like Japan. 

Notably, the sea lanes of communication in the case of Japan carry energy resources from West Asia and pass through the Indian Ocean. Acknowledging this security reality, nearly 40 percent of all Japan’s Self-Defense Force missions have occurred in the Indian Ocean Region (IOR) and a half of its Official Development Assistance (ODA) goes into the Indian Ocean Rim countries.

Lending Strategies to Boost Naval Power

China recognizes fully well that in order to boost its naval power projection, it will have to gain greater access to ports and berthing facilities. This is increasingly reflected in China’s lending strategy of granting huge loans to smaller coastal island nations that are in dire need for developmental funds to improve infrastructure. 

The pattern is unvaryingly similar for handing out these loans. It is one in which no conditions and/or transparency measures while issuing the loan are outlined by China. As soon as the island nation in question reaches the stage where it is unable to repay the loan on time, Beijing appears to strategize, offering relief such as waiving off or relaxing loan conditions in exchange for a few berths, for example, in the targeted naval facility.

Given its strategic placement, Sri Lanka has been the pivot of rising Chinese naval presence in the IOR. And this is reflected in its substantial controlling stake in the Hambantota port of Colombo. 

The cumulative maritime activity of the PLA Navy and its mounting forays into the Indian Ocean, the third largest water body in the world, is a clear indicator of China’s aggressive maritime strategy in and around the Indian Ocean, and a direct challenge to nations such as India and Japan.

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Author: Dr. Monika Chansoria

Dr. Monika Chansoria is a senior fellow at The Japan Institute of International Affairs in Tokyo. The views expressed here are those of the author and do not necessarily reflect the policy or position of the JIIA or any other organization with which the author is affiliated. She tweets @MonikaChansoria. Find other articles by Dr. Chansoria here on JAPAN Forward.