The Sri Lankan crisis: The curious case of China’s complicity

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By Aditya Gowdara Shivamurthy

As the humanitarian situation in Sri Lanka turns grave, the people of the island state have continued to demand President Gotabaya Rajapaksa’s resignation. Much of this anger against the Rajapaksas’ economic mismanagement and populist policies seems justifiable. But there is another reason for this crisis that remains less discussed within Sri Lanka, i.e., China.

China, however, has conveniently shifted the blame to the borrower rather than the creditor. It has held Sri Lanka responsible for the depletion of its foreign exchange reserves and long-term economic mismanagement vis-à-vis unsustainable project proposals and borrowings.

True, Sri Lanka would not have reached this situation if it weren’t for the domestic politics of populism and the subsequent governments’ economic mismanagement. But both these factors are also closely related to the China factor. Beijing’s contribution to the crisis is complicit and inseparable, and yet, it has hardly assisted its so-called all-weather friend and partner in this dire hour.

 China and the rise of Rajapaksas

The current situation in Sri Lanka is majorly a product of populism and populist policies. In this case, it is significant to assess the rise of Rajapaksas as the dominant force in Sri Lankan politics. Mahinda Rajapaksa began his first tenure as the president in 2005. He was assisted by his siblings who held key portfolios in the government, including the Secretary of Defence. Their ability to end more than two and half decades of civil war through iron-fist policies had, however, garnered mass appeal from the Sinhala nationalists. Their policies were so popular that the Rajapaksas won the 2019 elections by vastly focusing on national security alone.

But this legacy and successful end to the civil war was possible only with China’s fast-tracked and unrestricted supply of weapons, arms, ammunition, and artilleries to the regime. This was essential at a time when the West was concerned about human rights violations and India was more anxious about the plight of the Tamils. China’s lack of interest in the internal developments in Sri Lanka and their defence of the Rajapaksas against charges of human rights violations further cemented this relationship. The Sri Lankan leadership had thus found a new partner to balance the West and India and to overcome their pressure. This lack of heeding to the international pressure also strengthened their strong-man image and appealed to their Sinhala-nationalist vote bank.

Similarly, the post-war economic recovery also ushered in much-needed confidence in the leadership and the government. Here again, China’s role had been crucial. Between 2005-2015, China emerged as Sri Lanka’s leading source of development assistance and FDI. As an economically recovering Sri Lanka proposed several mega infrastructure projects, China seized the opportunity to invest in these projects. This enthusiasm was a product of China’s growing economic strength and desire to be the next Asian power. On the other hand, Sri Lanka found it easier to seek assistance from China considering its quick disbursement of loans and lack of interest in Sri Lankan domestic politics. In most cases, China also provided technical, financial, and economic assistance to these projects.

These infrastructure projects energized the country’s construction and retail activities and initiated a temporary economic boom. Although these investments lacked the potential to offer the returns, they were exhibited to the public as a showpiece of the government’s desire of transforming Sri Lanka into the next Singapore. These visible infrastructure developments accompanied by the temporary economic boom created a façade of development and thereby, strengthened Mahinda’s position further.

These post-war years were vital for the Rajapaksas to entrench themselves as the dominant players in Sri Lankan politics. And China played a pivotal role in shaping this factor of populism, which subsequently led to the unfolding disaster in the island state.

Exploiting loopholes and exaggerating structural issues

Another crucial factor in the crisis has been Sri Lanka’s economic structure, mismanagement, and inexhaustive project proposals. Here too, China’s role has been critical. Beijing saw the investment opportunities as a means to entrench its influence and investments, while the Rajapaksas used this as an opportunity to reap political and economic benefits. As a result, the Sri Lankan leadership handpicked certain Chinese firms to invest in specific projects; signed abstract agreements; promoted opaque companies and investments; accepted loans with higher interest rates than those offered by the Asian Development Bank (ADB) or the World Bank. They also rejected and made it difficult for investments from India, Japan, and the US. In return, the Rajapaksa clan enjoyed China’s external support, benefited from their election campaign funding, and also expanded their coffers.

With this political support and elite capture, these Chinese-funded projects and finances cumulated with time. And by the time Rajapaksa’s successors took over in 2015, these Chinese investments and loans were so deeply embedded within the Sri Lankan economy that any kind of disconnect with China became unimaginable. Subsequently, the Chinese investments and projects continued to flow in Sri Lanka. The return of the Rajapaksas in 2019 further fast-tracked these investments and initiatives.

Overall, China preyed on Sri Lanka’s economic vulnerabilities, loopholes, and corrupt practices for its political and economic calculations. And for Sri Lanka, the easy flow of money further emboldened the government to ignore structural weaknesses such as low levels of Foreign Direct Investment (FDI), tax revenues, failure to diversify exports, and budget and trade deficits. China’s lack of concern for the island state’s economic and political situation thus came at a cost. Sri Lanka’s unlimited proposals and consistent Chinese investments even exaggerated these structural weaknesses, thereby contributing to the current crisis.

 Unsustainable borrowing and debunking the myth of Chinese innocence

Finally, the crisis is also a product of Sri Lanka’s unsustainable borrowing. Sri Lanka has a history of sustaining its economic growth through external borrowings. In this regard, it is often asserted that Beijing is just another lender to Sri Lanka. To substantiate the argument China’s 10% of lending is often compared to 47% of lending from the private market.

True, the market lending in Sri Lanka overshadows those from China. But to counter the argument, these market borrowings are not from a single entity, and neither are these non-state actors able to change the broader geopolitical structure. Parallelly, China is the largest bilateral donor to the island state, and it has offered excessive projects and loans to the island state, despite knowing its economic and political limitations and vulnerabilities. Thereby, sucking Sri Lanka into its broader debt trap ambitions.

Interestingly, China is also the only lender whose percentage of outstanding debts is double its total debt stock. This might be for two reasons: Maturing Chinese loans in recent years or high-interest rates on the loans. Which in either case means that Sri Lanka owes more money to China. Essentially, these consistent repayments of external debts—of which China is a major stakeholder—further dried the forex reserves. Thus, contributing to the humanitarian and economic catastrophe.

Conclusion

The crisis in Sri Lanka has been in the making for the past two decades. Although a lot of blame has gone on the island state’s domestic developments, Beijing’s contribution to the crisis is inseparable. The story of populist Rajapaksas, unsustainable borrowings, and structural fallacies is essentially incomplete without the China factor. Understandably, China has conveniently blamed others for the crisis. But its mere US$ 76 million aid to the island state has also raised several critical questions over China’s reliability and ambitions and the implications of their projects, loans, and elite capture. If any country understands the significance of these questions, then distant developments such as the Indo-Pacific Economic Framework might appear even more important and personal to them than ever.

 -Aditya Gowdara Shivamurthy is a Research Assistant with ORF’s Strategic Studies Program and this article  is part of the series, The Unfolding Crisis in Sri Lanka

 

 

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