Sri Lanka crisis: India's benign diplomacy wins over China's stifling embrace

For weeks now, Indian commentators have been claiming vindication of the country's foreign policy after its neighbours, Nepal, Sri Lanka, and Pakistan have come to grief after getting mired in an impossible debt trap caused by hefty high-interest loans from China. This precipitous meltdown of their economies triggered by profligate governments that pandered to populism has allowed the Indian government to reclaim much of its lost influence in the region. Sri Lanka, which is in the throes of a severe economic crisis with masses baying for the blood of the ruling Rajapaksa family, is the test case of how India endeavours to strengthen its presence in the teardrop Indian Ocean Island.

The turmoil and the growing resentment towards China have placed India on the right side of history. It is trying to show that its model to help neighbours without smothering them in debt or hurting their sovereignty is superior to that of China. Indian efforts have been helped by some smart diplomacy that is using the deep division in the ruling family on how to save the government. There are reports that the Rajapaksa brothers are on the opposite sides of each other on how to tide over this crisis.

President Gotabaya Rajapaksa, whose name has been used by sloganeers to demand his exit, is hoping that India can find a way to allow his beleaguered government to ride out the public protests and survive this crisis. His brother Mahinda Rajapaksa and PM, and former president, is still banking on China to reschedule its debt and infuse fresh loans into the system to buoy the economy. China has promised help but not the rescheduling of its debt.

Mahinda Rajapaksa's supporters are resisting the IMF loan, which would involve bringing in harsh conditionalities that would end the government's welfare policies and restore the high tax regime that Mahinda Rajapaksa slashed as part of an electoral promise. Those opposed to the Fund believe that it is possible to turn around the economy without going through a brutal surgery that conditionalities normally. Prime Minister Rajapaksa also fears that allowing the IMF to look into the country's finances could mean opening Pandora's box as it could identify alleged wrongdoing in funding by China of the port city of Hambantota. Indian Finance Minister Nirmala Sitharaman has nudged the IMF to bail out Sri Lanka. New Delhi may use the Fund to raise funds to help its neighbour to survive life after a debt default.

Historically, Sri Lanka has always spent more than it earns, but due to its strategic location, natural beauty and its bright people, it has serendipitously gotten out of its economic problems. What proved to be the precipitating factor for this economic crisis was not so much the rise in oil prices due to the Ukraine war but the calamity that visited the country after the Easter Sunday attack in 2019. The country lost all the revenue it earned from tourism in no time. The previous year in 2018, it had earned in excess of US $5 billion from tourism and another US $7 billion from remittances from abroad, which later became a casualty when the pandemic swept the world and the island. After these two events, the country began to stare at the possibility of defaulting on its debt servicing obligations of about US $6 billion. Now the Sri Lankan debt has touched a high of US $53 billion.

How did the tiny island pile up such a high debt? After the Sri Lankan army fought and won the war against the Tamil Tigers in 2009 that saw the brutal decimation of its entire leadership and its fearsome cadre, the Rajapaksa government had to contend with the charge of serious human rights violations by the army. At that time, no country was willing to give Sri Lanka a loan to rebuild its war-torn economy or fulfil Mahinda Rajapaksa's grand vision.

As loans were hard to come by, the government issued sovereign bonds. The cash that came in its wake created an illusion of well-being. Riding on this leaven, Sri Lanka was declared a middle-income country, but as the economy did not have a viable revenue stream like a robust tourism sector and other export-oriented industries, the economy began to flag. At this juncture, China enticed the hapless island into a debt trap that saw the Sri Lankan government using up the Chinese loan to build expensive but unviable projects like the Hambantota port and Colombo Port City.

As Sri Lanka could not repay the loan for constructing the Hambantota port, it was forced to give it up and the adjoining land on a 99-year lease. During a visit to Hambantota, this reporter found angry farmers resentful toward the Rajapaksas for handling the infra project and villages around that to the Chinese. In 2013, the Sri Lankan government built what has been dubbed later as the "world's emptiest international airport" at Hambantota. So sparse and infrequent were the stoppages to the airport that the nearby farmers used the airport for storing grain. From the very outset, it was clear that the small island country like Sri Lanka had no real need for two airports, but China fed the misplaced ambitions of populist leaders to turn their country into something it could not be. In the absence of democratic accountability of either Chinese funds or due diligence of projects, these mega plans fulfil two major objectives: They meet China's ambitions to create a string of ports and airports to give meaning to its Belt and Road initiative and secondly, throw countries inexorably towards debt trap, which results in loss of sovereignty.

To the credit of India, it opposed the Belt and Road initiative from the time it was conceived. New Delhi had raised fears of how there were no guarantees in the BRI from China to prevent recipient countries from losing their sovereignty. Maldives and Sri Lanka, relatively smaller economies, came into the arc of attack of the Chinese predatory lenders. Due to the ambitions of their populist leaders, who were fed on a steady diet of envy for their big neighbour by their lenders, these islands have become examples of what can go wrong when you get your eyes off the ball.

(The writer is the Editor of 'Hardnews' magazine)

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