ROLE OF EXTERNAL PLAYERS IN SRI LANKA | The Financial Express

Role of external players in Sri Lanka

Sri Lanka will be subject to a lot of pressure and pulls from foreign players. In the current conditions, as Sri Lanka recovers from a meltdown, it has to be able to withstand external pressures while contending with internal issues. In this context understanding the role of external players in Sri Lanka is important.

Role of external players in Sri Lanka
Sri Lanka is a devastated nation in a deep political and economic crisis. Credit – Reuters

By Lt Gen P R Shankar (R)

Sri Lanka occupies a central and critical location in the Indian Ocean Region (IOR). Its geostrategic location straddles international maritime routes. It will always be an important player in power projection and geopolitical moves in the IOR. Resultantly Sri Lanka will be subject to lot of pressures and pulls from foreign players.

In the current conditions, as Sri Lanka recovers from a meltdown, it has to be able to with stand external pressures while contending with internal issues. In this context understanding the role of external players in Sri Lanka is important.

Sri Lanka is a devastated nation in a deep political and economic crisis. It is also a highly indebted nation. The role of external players in Sri Lanka is critical to its recovery in addition to internal factors in the current crisis. The external factor is almost directly related to what it owes to the world.

The major creditors of Sri Lanka are international aid agencies like IMF, World Bank and the ADB. Major creditor nations are China, Japan, and India. In addition, USA and Pakistan will have a role to play in Sri Lanka as the future unfolds.

Sri Lanka needs infusion of liquidity into its system to ease the crisis. To this end it needs a bailout from IMF which is under negotiation. However IMF has certain demands. It will insist that Sri Lanka carry out restructuring of its loans with other creditors. That is to ensure that the IMF loan is not diverted to service of repay other loans.

IMF will also insist upon reforms which mainly hinge around withdrawal of tax concessions and subsidies. Most of these populist handouts were given out as political leverages by the Rajapaksa government. This has implications since costs of daily requirements like food and fuel will go up.

Further IMF will insist that India virtually stands as guarantee. The IMF loan has internal and external political implications. It will need extremely good governance and deft handling of Sri Lanka’s internal political forces to even go through the IMF program. It is to be seen till what level the current government can be able to put the program through.

Since 1965, Sri Lanka has been given 16 IMF bailouts. This time around the Rajapaksa family found it convenient to go to China as an alternate lifeline, since it did not insist on thetough policy-reform conditions which come along with the IMF loans. As a result, China is the single largest creditor of Sri Lanka. It is commonly believed that China holds 10% of Sri Lanka’s foreign debt.

Also Read: Crisis-hit Sri Lanka strikes preliminary loan pact with IMF

However in actuality, the total goes up to 26 % including commercial loans from Chinese banks, which are an extension of the Communist government. Hence China will play a huge role in Sri Lanka’s future. Itis internationally recognised as having put Sri Lanka in a debt trap through building unviable big ticket projects like Hambantota, Colombo Port City, Mattala Airport and so on.

While advancing loans for these big ticket projects, China disregarded project viability norms and also overlooked social impacts. China’s interest in Sri Lanka is based on its geopolitical ambitions whose corner stones are its Two Ocean Strategy for establishing a Sino Centric World Order and its String of Pearls strategy against India.

It has bought out the political influence of the Rajapaksa family to further its aims and debt trap Sri Lanka. Very interestingly, in 2020, China gave an ever greening loan of $3 billion to Sri Lanka as the current crisis was unfolding. Sri Lanka opted for this path rather than going in for IMF reforms and restructuring.

In the current situation, indications are that, China would seek bespoke negotiations and preferential treatment from Sri Lanka in settling loans. As a result, it will delay the overall debt restructuring and IMF bailout. From another perspective; this is the first major, uncontrolled collapse where China is a dominant lender.

Additionally, China’s economy at home is cooling down. Both these factors have curbed China’s role and risk appetite in Sri Lanka. At this point of time it is maintaining a distance from Sri Lanka due to many reasons including the fact that domestic Chinese sentiment is anti Sri Lanka. Not with standing all this, Sri Lanka is a vital cog in China’s global dreams. The Yuan Wang incident indicates that China will not give up its ambitions. China will be the proverbial Shylock in this game.

Japan and Sri Lanka have had a cordial relationship since 1952. It is a major creditor of Sri Lanka. Japan provides grants, loan assistance and, technical cooperation, support through UN agencies, World Bank, Asian Development Bank and Local, Japanese, and International NGO’.

Also Read: Sri Lanka’s Central Bank Governor Weerasinghe says country must manage existing resources

It has focussed on consolidation of peace and post conflict reconstruction. Japan has always had a multipronged pronged line of action which includes promoting high quality inclusive growth, development cooperation for inclusive growth, mitigating vulnerability and tsunami relief.

It has a medium and long-term vision for development to encompass socio-economic infrastructure, poverty alleviation, human resources development  and climate change adaptation and mitigation. As a result, its projects are people oriented and largely in consultation with international bodies.

In May 22, it provided Sri Lanka with an emergency grant aid in the current crisis to directly assist the people. It is supporting Sri Lanka along with India in the IMF deal. India and Japan have also joined hands to help Sri Lanka during the current economic crisis. It is also working with India to assist Sri Lanka in recovery. Japan is also pushing for a “Free and Open Indo-Pacific.”

India has emerged as the main player in the current crisis to assist Sri Lanka. It has provided a lifeline of essentials to Sri Lanka and is standing by the people as a ‘friend in need’ rather than extending support to any political entity. It has a great opportunity to regain lost geopolitical importance and relevance in the nation.

India’s twin interest in Sri Lanka is stability in its civilisational neighbour and to marginalise Chinese influence in the region. India has been most helpful in the crisis and has provided Sri Lanka with $3.8 billion in the form of currency swaps, loans, food and fuel aid without demur.

There is a comprehensive plan being worked out to increase economic and infrastructure ties with Sri Lanka.India is standing by Sri Lanka to secure it the IMF bailout package. No other country has come forward for any kind equivalent help. This is widely acknowledged. However India operates under the shadow of IPKF and LTTE period. At that time it went in as a friend and exited as an outsider to both Tamils and Sinhalese.

This led to its marginalisation and created space for China’s entry into the country. It must take care  not to cross the line beyond which it will be once again seen as interfering directly in the internal affairs of Sri Lanka. India’s opportunity lies in China’s economic slowdown, internal problems, its preoccupation with Taiwan and USA.

It should aim to ensure that Sri Lanka is the first ‘pearl’ to fall off the ‘string’. It should also steadily work for devolution of power to Tamils. The Centre must work hand in glove with TN and ensure there is adequate synchronisation between the two. At this point of time India is emerging as the pointsman to USA, world bodies and QUAD.

USA and Pakistan are not major creditors to Sri Lanka but have an influence in the nation due to different reasons. The USA’s nod will be necessary if the IMF bailout is to come through. At this point of time there is strategic convergence between USA and India. It is allowing India to play the lead role. It will not lose this  opportunity to strengthen the Indo Pacific strategy. It will attempt to counter China’s influence in conjunction with India and Japan. USA is likely to play a stronger role in reviving Sri Lanka’s economy after deal with the IMF.

Pakistan has always had good ties with Sri Lanka. It was the main provider of arms during the LTTE period. Despite its major internal problems, Pakistan retains the capability of playing the spoiler in Sri Lanka at China’s behest. This must be expected, and all precautions must be taken to ensure Pakistan stays marginalised. The recent docking of PNS Taimurin Colombo and a naval exercise between the two countries is an indicator of good Pakistan and Sri Lanka relations despite all other detracting factors.

The role played by external powers will determine the future of Sri Lanka and peace in our neighbourhood. The Yuan Wang incident and its aftermath which is still playing out, indicates that China will not let go of Sri Lanka. It is too important for Chinese global ambitions.

China will do everything in its power to thwart India form regaining space while enhancing its hold in Sri Lanka. Further, China will have a big role to play in Sri Lanka due to the sheer size of its investments and the big-ticket projects involved. India needs to recognise this and not wish it away.

At the same time China is also preoccupied with its internal issues. Chinese domestic sentiment towards Sri Lanka borders on hostility. It has not lifted a little finger to assist Sri Lanka in any manner to tide over the current crisis. The opportunity presented in this circumstance needs to be grasped by India. While India is doing much more than any other country to be Sri Lanka’s friend, it has its own limitations.

India cannot do it alone. India needs to work in conjunction with Japan and USA to assist Sri Lanka and whittle down the Chinese influence. This is going to be a long haul and India needs to last it out on a permanent basis with an equally long term plan.

The author is PVSM, AVSM, VSM, and a retired Director General of Artillery. He is currently a Professor in the Aerospace Department of IIT Madras. He writes extensively on defence and strategic affairs @ www.gunnersshot.com.

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