Debt-ridden Sri Lanka snuggles up to China again at India’s expense

NEW DELHI: India is hoping to host Sri Lankan President Maithripala Sirisena this month for a multi-religious event at Ujjain which will be inaugurated by PM Narendra Modi. The visit by Sirisena, if it happens, will come at a time when India's strategic gains in the island nation over the past 15 months, or since the ouster of Sirisena's predecessor Mahinda Rajapaksa, seem to be fast petering out.
India was looking to sign an Economic and Technology Cooperation Agreement (ETCA) with Sri Lanka, which the two countries decided to negotiate after Lanka backed out of CEPA, but the proposal has run into resistance from the Rajapaksa-led Joint Opposition. China has managed to not just revive its flagship $1.4 billion Colombo Port City project, but it is now also engaged in expansion of major infrastructure projects it built in the past and which were seen as impracticable until recently.
These projects include expansion of the Hambantota port and the Mattala airport which were built by the Chinese under Rajapaksa and whose commercial viability was always suspect. China and Sri Lanka, in fact, are now also considering setting up an SEZ in what is also Rajapaksa's home district.
While Sri Lanka has assured India that it won't allow China any outright ownership of land as part of the Colombo Port project, its revival of Chinese projects, according to strategic affairs expert Brahma Chellaney, is likely to have a long-term geopolitical significance.
"Lanka, under Maithripala Sirisena's government, has reversed course and is returning into China’s embrace, in part because of its precarious balance-of-payments situation and in part because Indian diplomacy still lacks teeth," says Chellaney.
Sri Lanka owes $8 billion as debt to China and it announced recently that it was looking to convert a portion of this debt into equity for infrastructure investment by Chinese companies.
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As India implores China to distance itself from terrorists operating out of Pakistan, Chellaney says Sirisena’s government knows that India will impose no strategic costs for reviving the very Chinese projects that Sirisena had put on hold after coming to power. "It now appears that Rajapaksa’s ouster only temporarily represented a setback for China’s 'string of pearls' strategy in the Indian Ocean," he says.
In fact, after PM Ranil Wickremesinghe’s visit to China last month during which he reiterated Lanka’s endorsement of Beijing’s Maritime Silk Road, Rajapaksa was quoted as saying that he stood vindicated by the Lankan government’s recent actions.
It was Rajapaksa who drove Lanka into the arms of China as his election as president in 2005 coincided with China’s growing role in the infrastructure sector. China’s ``no-strings overseas aid and loans” policy extended through offers to Rajapaksa soon saw China replacing Japan as largest donor to Lanka. The Rajapaksa government accepted these loans at a very high rate of interest and this is mainly responsible for the debt Sri Lanka now owes to China.
China provided assistance worth $5.056 billion to Sri Lanka between 1971 and 2012. Around $4.7 billion of this amount, or 94 per cent, came after Rajapaksa came to power in 2005. China committed funding worth another $2.18 billion after 2012, mostly loans at high rate of interest
Now, while PM Ranil Wickremesinghe remains committed to signing ETCA this year, he is having to stave off serious resistance from the Rajapaksa-led Opposition which has stoked fears about the agreement leading to loss of jobs in the country in the services sector.
As a Lankan diplomat told TOI, there are many in Lanka who believe that CEPA, which the government abandoned after many rounds of negotiations, is now making a back door entry through ETCA. The Modi government clearly has its work cut out in its ties with India's most strategically located neighbour in the Indian Ocean.