Before Sri Lanka declared bankruptcy under the government of Gotabaya Rajapaksa, it sought assistance from China to meet its debt obligations. During the height of the economic crisis, China’s foreign minister visited Sri Lanka, and Gotabaya reportedly requested a loan of US$2.5 billion. At the same time, the Central Bank Governor Ajith Nivard Cabraal was engaged in discussions with China to secure financial assistance. His view was that, with Chinese financing, Sri Lanka could overcome the economic crisis without declaring bankruptcy or turning to the International Monetary Fund. Mahinda Rajapaksa shared the same belief and held discussions with the Chinese Prime Minister via Zoom, seeking China’s support.
China, however, was willing to assist only under certain conditions. President Gotabaya and Finance Minister Basil Rajapaksa reportedly feared that meeting those conditions could anger India and the United States. As a result, they decided to declare bankruptcy and seek assistance from the IMF. That decision was later implemented by Ranil Wickremesinghe after he became president. Having continued the IMF programme initiated under Ranil without disrupting it, President Anura Kumara Dissanayake is now signaling that Sri Lanka may not sign a new agreement once the current IMF programme concludes next year.
Chinese projects in Sri Lanka came under greater constraints following the IMF agreement. It remains unclear whether the government’s apparent reluctance to enter into a new IMF programme after the current one expires is motivated by a desire to gain greater economic freedom and thereby engage more comfortably with China.
China is aware that its influence in Sri Lanka diminished after the IMF agreement came into effect. It is evident that the Sri Lankan government has been cautious in its dealings with China in order to safeguard the IMF programme and to accommodate the interests of the United States and India, both of which have a strong interest in ensuring the programme’s success. The clearest example is the issue of Chinese research vessels. Ranil Wickremesinghe’s decision to restrict Chinese research ships, and Anura’s decision not to reverse that policy, reflected an understanding of how closely Sri Lanka’s economy had become linked to India and the United States through the IMF-backed recovery framework.
If Anura ends the IMF programme and begins pursuing closer engagement with China, it remains unclear how the United States and India would respond. The Anura administration initially appeared to believe that the United States would defeat Iran through military action. However, the Chinese influence on the war leverage demonstrated in the context of the recent US-Iran peace agreement has presented a new dynamic. How Anura’s government interprets and responds to this changing geopolitical reality remains to be seen.
