India is trying to keep Sri Lanka out of the arms of China

Indian Foreign Minister Subrahmanyam Jaishankar visited Sri Lanka this week to offer assistance to the struggling Sri Lankan economy in a bid to distance it from a decades-old Chinese embrace.

Sri Lanka’s economic crisis two years ago comes after two decades of massive Chinese investment, under what a geopolitical expert described as “strategic trap diplomacy”.“

The presence of an increasingly assertive giant neighbor closely intertwined with Sri Lanka has destabilized India, which is locked in a standoff with China over their disputed frontier in the Himalayas. Sri Lanka’s economic crisis offers India an opportunity to wean the country away from the Beijing crisis Effect.

Perched off the busy East-West shipping lanes, Sri Lanka has attracted billions of dollars in investment under China’s Belt and Road Initiative. The program was launched in 2013 to build ports, roads, railways, pipelines and other infrastructure across Asia.

But China has captured at least one strategic port When Sri Lanka failed to service its debt. New Delhi scored a small but significant victory on Tuesday when it snatched an energy project that had been awarded by China earlier.

India is also trying to outsmart China in providing financial assistance to Sri Lanka, which is dangerously running out of foreign reserves to service its debt. According to central bank data obtained by Reuters, Sri Lanka currently has about $2 billion in foreign exchange reserves against $7 billion in total debt due this year, Including $1 billion in notes due in July.

During the Jaishankar trip, Sri Lanka sought to obtain $1.5 billion credit line To buy basic commodities, Reuters reported. This is in addition to the $2.4 billion that India has transferred since January via currency swaps, loan deferrals and credit lines.

China, which has deep pockets, has yet to agree to Sri Lanka’s request for a $2.5 billion credit line or restructure its overall debt. About 22% of Sri Lanka’s debt Due to bilateral creditors – China and Japan (10% each) as well as India (2%).

Milk, medicine and petrol are running out

There is a shortage of food, milk, medicine and other basic commodities Where the inflation rate exceeded 17%. Power outages are common and some people have died of heat stroke while waiting in long lines to buy fuel.

India is trying to stabilize the region, said Gulpin Sultana, associate fellow at the Manohar Parikar Institute for Defense Studies and Analysis in New Delhi.

“The presence of China worries India, right. But India and Sri Lanka are also maritime neighbors. Any instability in Sri Lanka will have an indirect effect on India,” she told CNBC.

More than ten refugees have arrived in India via Indian media, citing intelligence sources, reported that an estimated 2,000 more would follow in the coming days.

The Sri Lankan nationalist Rajapaksa government, which had hoped to weather the crisis without the help of the International Monetary Fund, reversed course this month. Finance Minister Basil Rajapaksa, who is also the president’s brother, is scheduled to travel to Washington to present policy proposals to the lender.

Sri Lanka sought IMF bailouts 16 times in the past 56 years, It is second only to debt-ridden Pakistan.

The current crisis was driven by tax cuts that hurt government revenues that were already under pressure after The Covid-19 pandemic has destroyed a $5 billion tourism industry. in 2020, Real GDP shrank by 3.6% Sri Lanka lost access to international debt markets after its ratings downgraded.

They fell into the “strategic trap”

China has yet to agree to Sri Lanka’s request for debt restructuring. Ganechan Wenaraja, a non-resident senior fellow at the Institute of South Asian Studies at the National University of Singapore, attributed China’s reluctance to two factors.

“First, it will set a bad precedent for other countries that have borrowed from China,” he told CNBC from Colombo. And second, it would associate China with failure because the Sri Lankan economic model was based on China.

China’s Foreign Ministry did not immediately respond to CNBC’s request for comment.

Sri Lanka adopted the Chinese model of infrastructure-led growth in the early 2000s on the grounds that it would create jobs and lead to prosperity. No reliable figures are available, but the cumulative value of Chinese investment in Sri Lanka’s infrastructure is estimated at more than $12 billion between 2006 and 2019.

After the financial crisis in Sri Lanka, Colombo also fell into a “strategic trap”, said Asanga Abeyagoonasekera, a Sri Lankan geopolitical analyst and senior fellow of the Millennium Project in Washington.

He described the strategic trap as an extension of the “debt trap” in the human rights, political and security aspects. He added that China is protecting Sri Lanka from criticism of its human rights record at the United Nations and prefers an authoritarian and heavily militaristic model of governance over democracy.

“The quantitative economic projection of the debt trap falls short in capturing the strategic depth of Chinese projects. Chinese projects have a long-term strategic design that can comfortably bring a ‘hybrid model’ of civil-military activity to the country, a security concern for Sri Lanka and the entire region.”

“China’s large-scale infrastructure loans are one of the immediate concerns, none of which can generate expected returns for loan repayments,” he said, describing Chinese loans as “mysterious.”“

Both reports believe that IMF assistance will be essential to resolve Sri Lanka’s economic issues.

Wignaraja suggested that Sri Lanka would be better served if India added its “strong voice” to Colombo to implement an IMF program calling for deep economic reforms.