In South Asia, Sri Lanka finds itself being caught between a rock and a hard place; while China, Colombo’s largest lender, is not cooperating with it to restructure its external debts, the island nation is increasingly being bumped off by Beijing on the strategic front. Chinese military vessels’ regular forays into Sri Lankan waters are mutely acquiesced by Colombo even as their visits inflict huge damage to the island nation’s geopolitical interests in the region.
Sri Lankan President Ranil Wickremesinghe is expected to visit China in mid-October to attend the 10th-anniversary summit of the Belt and Road Initiative, a Beijing-led infrastructure project that has stoked controversy worldwide for its opaqueness and pushing countries into an unsustainable burden of debts. As per Nikkei Asia, the Sri Lankan President, during his meeting with Chinese President Xi Jinping, will discuss debt relief.
Sri Lanka officially owes 10% of its total external debts over $50 billion to China. However, the island country’s commercial borrowings from China’s commercial banks are not part of Colombo’s official statistics. 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.
Deep in the economic crisis, Sri Lanka which had to see its then President Gotabaya Rajapaksa fleeing the country in 2022, has repeatedly requested Beijing to restructure loans provided to it for the development of projects. This year on August 16, Chinese Foreign Minister Wang Yi “vowed that China will help Sri Lanka effectively address the challenge of financial debt,” during his meeting with Island nation’s Prime Minister Dinesh Gunawardena on the sidelines of the China-South Asia Exhibition in Kunming, the capital city of China’s southern province of Yunnan. But like earlier assurances from Chinese authorities to Sri Lanka, this too by Wang Yi on debt relief has not seen any action.
Sri Lanka desperately needs cash under a $3 billion bailout package from the International Monetary Fund. First tranche of aid from the multilateral bank has been already received by the Island nation. In the second tranche, it is expected to receive $330 million in aid from the IMF. However, it will not be provided unless China and other bilateral lenders restructure debt relief to Sri Lanka.
In March, the crisis-stricken Island nation received the first tranche of $330 million from the IMF and it happened after China reluctantly joined other lenders like India and Japan in agreeing to restructure loans to Colombo. “Beijing offered a two-year moratorium for the Sri Lankan debt and talked of providing new loans to pay for existing debt,” a diplomat was quoted by Nikkei Asia as saying.
Forget about providing new loans, China even backtracked when it came to clearing the way for the second tranche of the IMF aid to Sri Lanka. In fact, Japan, India, and France formed a committee for talks among bilateral creditors to work out the restructuring of the Island nation’s debt. In April, an invitation was sent to China to join the committee in Paris to work out the plan for Sri Lanka’s debt restructuring.
But China refused to join the committee and instead, it said that it will deal directly with Colombo. Other lenders, as per Nikkei Asia, had no problem with this arrangement and were “prepared to let Sri Lanka deal with China at the bilateral level.” But lenders wanted to ensure that there would not be any special deal favouring Chinese debt terms with no haircuts, while expecting haircuts from other creditors. Sri Lanka assured that there would not be a special deal with China.
In May, Sri Lankan creditors held a virtual meeting which was attended by 26 countries along with China. 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 this impasse on the Island nation’s loan restriction continues, China has never shied away from putting Colombo on a sticky wicket on the strategic front. Burdened by billions of dollars loans from China because of unsustainable infrastructure built in the Island nation under the Belt and Road Initiative, Sri Lanka is compelled by Beijing to welcome its military vessels at the Island nation’s ports. In August 2022, Chinese Navy’s Yuan Wang 5, known for its surveillance capabilities arrived at Hambantota Port—a deep sea port on a 99-year lease to China from 2017.
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.
Sri Lanka, overwhelmingly burdened by external loans, has to reluctantly accept China’s whimsicality and this; it does to keep Beijing in good humour. Analysts, however, see it as Beijing’s well-known strategy to first, burden a developing and vulnerable nation with loans and then extract whatever benefits—politically, economically, geographically and strategically—it can draw from that hapless nation to suit its interests.
