The Political Turmoil in Sri Lanka puts the ambitious Belt & Road Initiative at Risk.
“Important nods of the Belt & Road Initiative as Russia, Pakistan, and Sri Lanka are going through a crisis, which could threaten the development of the BRI. The strategic projects like the China Europe railway system, the CPEC , the Gwadar Port, the Colombo Port City, the Hambantota Port, and other investments could be under risk”
Post-colonial era Sri Lankan economy was one of the most circulating economies in Asia, this was mainly due to infrastructure and trade commodities that were developed by the British empire during the colonial rule. However, the Sri Lankan economy was pulled back for a brief 30 years due to the civil conflict which pushed back the development of economic pivots in the island state. In the post-civil war era, the Sri Lankan economy was badly damaged and the nation was desperately looking for international support to overhaul its infrastructure. Sri Lanka went through different eras building its trade relations over the years, where India and China played an important role.
Over the centuries India and Sri Lanka shared history, culture, language, religion, trade, etc. however, In a geopolitical formation and internal Indian security strategy, India wishes to keep Sri Lanka in an economically and socially stable position under its orbit. The main reason for the 1987 Indo-Lanka Accord is to hold such order and make Sri Lanka comply with the Indian National Strategy, in other words Sri Lanka is the ‘Ukraine’ of India. Sri Lanka was one of the first nations to identify the China’s Belt & Road Initiative and its maritime silk road. Since the BRI’s inception Sri Lanka was considered an important nod for the BRI, and let to robust its infrastructure to meet the economic development of a upper middle-income nation. However, the growing Chinese presence in Sri Lankan development projects raised the eyebrows of many nations especially one of Sri Lanka’s closest allies India.
As the world enters the post COVID era, the predicted global economic impacts are felt more vividly due to the Ukraine – Russia conflict. The Sri Lankan economic crisis was building up its momentum for decades. However, it got the current economic deadlock due to some late decisions by the government and due to the prevailing global situation. Sri Lankan economy was hardly hit due to the Easter Sunday attacks in 2019, which led to reduced the forex inflows via tourism and other business. During the 2020-2021 COVID era government expenses doubled, and the maturing sovereign bonds and international loans tumbled the economy further. Moreover, the crisis was very clear due to a few long-term downfalls as the damages from the 30-year civil conflict and social unrest, long term populist socialist policies, high public welfare, and the losses incurred by all the major state-owned enterprises (petroleum, electricity, railways, airlines, post, water board, etc.
Some economic experts identified the lack of microeconomic policy adoption as the root cause for the Sri Lankan Economic crisis and some criticized the necessity of having a short-term Return of Investment from major government development projects. The current political landscape not only enables the current government to stay in power but the lack of centralized parliament opposition and the power struggle among the leading opposition parties have led the opposition parties to an unstable situation, as a result, the political opposition is still unable to bring forward a motion of no confidence which has led to stabilizing the proceedings at the parliament.
However, at present many argued why the government decided not to cooperate with the International Monitory Fund (IMF) at the early stages of this economic crisis, which has now led to a common agreement between all Sri Lankan political parties to consult with the IMF urgently as a solution for the current economic crisis. In developing states globally, IMF bailouts are conceded risky among the general public, and in the recent past, it has created a social backlash due to the economic pressure it implies on developing nations. The most criticized after-effects of IMF bailouts are known to be interference in the internal affairs of sovereign nations and other accountability factors such as human rights, uniform law and order, privatisation of national assets, high tax policies etc. So, most developing nations avoid going to IMF due to its economic-centric conduct and the outdated communication strategy of the IMF.
However, this dominance of IMF as the only international financial mechanism for granting technology and funding to developing and least developed nations gave rise to choosing China’s BRI as an alternative approach towards ‘getting things done’ with less political interferences. Such upraise of BRI made it very attentive for the governments of developing nations as it was able to complete projects at a fast phase with a quick funding mechanism yet this method was vastly challenged among the financial professionals due to not having a proper economic feasibility study and return of investments on the projects which are taken up the BRI. The Hambantota Port scenario is the best example; both Sri Lanka and China pushed the project, while Sri Lanka didn’t have an operational plan once the port was complete, and China didn’t question Sri Lanka’s ability to pay back the loan before lending money. Such short-sited decisions not only damaged the image of China and Sri Lanka globally but also gave more room for critics to spread a false picture of the whole BRI globally and formed the term ‘Debt Trap Diplomacy’. However, the BRI should have implemented a parallel mechanism for ‘Risk and Recovery’ for its projects, not only domestically but also within the funding agencies and multilateral parameters.
The Belt & Road Initiative and the Indo- Pacific Strategy.
From the 1980s to the 1990s the People’s Republic of China was building its governing system domestically. The transformation of the Chinese political path was unpredictable. The hardcore nationalist China, Chairmen Mao crafted was turned three sixty degrees during Deng Xiao Ping’s strategic policy initiatives which paved the pathway for the small agricultural nation to become a global manufacturing powerhouse. In the 1990s During President Jiang Zemin, China reached another milestone by starting the initial work to enter the World Trade Organization and grating membership for capitalist business leaders in the Communist Party of China. The Chinese experiment set sail during President Hu Jintao’s era by simply making the Chinese economy four times bigger during his eight-year tenure. However, China sparked as a global superpower with President Xi Jinping’s ambitious strategy to relink the ancient trade silk roads under economic, international relations, and infrastructure development initiative which was moulded as the Belt & Road Initiative. The Chinese BRI model seems to work globally due to a few reasons one is because of China’s strict non-interference in other nations’ internal affairs approach. This approach was very influential especially in African nations and Asian nations due to the past colonial experience and aftermath of the Arab spring. However, due to the growing Chinese influence globally new strategic counter initiatives were launched, one of which is the Indo- Pacific concept.
The Indo- Pacific concept was launched with a strategic view of the Asia Pacific by combining the Indian and the Pacific Oceans, by which the Global North will have more space to mobilize and counter China’s growing maritime power and continue dominating the global order. Indo-Pacific Strategy is a term regularly used recently by the US, yet the Indo-Pacific region was widely published by the German geopolitician Karl Haushofer during the mid-1900s. Some argue that the US Indo-Pacific strategy is about extending US influence in the Indian Ocean, which was criticized by the Australian Citizens Party as a “re-enactment of Nazi strategy”
Moreover, the G7 nations led by the United States announced ‘Build Back Better World’ (B3W), which aimed to develop infrastructure in the developing world. A statement from G7 Nations noted that it would provide around US$ 40 trillion by 2035 for this initiative. However, there is little information given on how the funding for B3W will be arranged, also if the project progresses and tender for international bidders, there is a high chance that Chinese SOEs would quote a very competitive price compared to other global multinational companies.
Unlike the BRI, the B3W will face challenges given the past record of their international relations. The best example was the Millennium Challenge Corporation (MCC) grant which was provided to Sri Lanka, and was not welcomed by many local political movements, civil societies, and religious leaders who came forward to stop such engagement quoting past issues surrounding Syria, Libya, Afghanistan, and Iraq, etc. The Blue Dot network which was also proposed back in 2019 had the same principles as the B3W, yet it has not delivered any progress since then.It seems the underline ambition of the BRI is to build greater global infrastructure investments in alternative routes for global trade and create more decentralized connectivity which will build more anti-fragile trade systems.
The Future of Belt & Road Initiative in Sri Lanka.
The Colombo Port City, the Hambantota Port, Norochcholai Power Plant, and the expressways have all been built with technological assistance from Chinese State-Owned Enterprises, which are playing a vital role in building infrastructure in many emerging economies. One of the driving forces of the BRI is the State-owned enterprises (SOEs) of China. These SOEs are listed as top enterprises globally, including in the fields of railways, power generation, construction, aviation, ports, roads, etc. If not for the Chinese SOEs, the BRI projects would not be as efficient and the cost would have been double to pull infrastructure in Developing, Least Developed, and Small Island Developing States.
The current instability in Sri Lanka will have a vibrant effect on the ongoing BRI projects and investments. The most urgent problem faced by Chinese companies is the lack of materials and supplies in order to carry out the projects, also the sudden inflation creates turmoil in meeting the approved budgets, and the Forex crisis limits the import of essential machinery and materials. Sri Lankan bailout from IMF could have a negative impact on BRI projects as IMF will propose to adopt sharp microeconomic policies which will limit Sri Lanka to getting multilateral financial support. As Sri Lanka is officially the “Democratic Socialist Republic of Sri Lanka” a vast portion of the population sees the nation in a socialist framework with abundant welfare benefits for the public. A capitalistic economic-centric approach by the IMF can create some resistance from the general public, which can lead to upraise in political instability.
This is one reason why BRI wants to blend in with community values and reestablish common history under the ancient Silk Road. However, BRI projects were rushed in 2011, and most of it was not properly complied with the Return of Investment and terms and conditions to recover the loan (interest rates and grace periods) to sail during crisis periods as the current Sri Lankan economic crisis. In the coming decades, the development of the Colombo Port City and the International Financial Center will be vital for both nations in order to recover the Foreign Direct Investment and maximize their Economies. Also, in the coming decades, China will become a high-income nation which will result in increased cost of production and higher labor cost in mainland China. In such a situation, proper investments are needed to direct and reestablish global production in competitive markets. The next biggest hurdle for both nations is to identify the areas of bilateral trade development and finalise the Sri Lanka-China Free Trade Agreement (FTA). The political turmoiled in Sri Lanka have made the country a weaker nation not only financially but also in international relations. During the past few months, India took many initiatives to bring back Sri Lanka into its orbit, by lending money and getting the most controversial agreements under its belt. One of which was the Indian Adani group investment at the Colombo port making it the biggest investment in the Sri Lankan Port sector. The Adani investment was mainly focused on countering the CICT terminal which is operated by a Chinese State-owned enterprise. The CICT terminal highlights how Indian, and China investments were completed in the Sri Lankan ports sector. The CICT was able to capture a huge portion of transshipments to India via the Colombo port, and India felt that Chinese influence is dominating Indian Ocean maritime hubs are not strategically favorable. Also, some argue that the Louts Telecommunication Tower in Colombo which was built by a Chinese SOE is still not operational due to Indian influence as it could be used as a pivotal spy tower.
This could also be a reason why Sri Lanka- China FTA is not coming into effect or moving forward with the negotiations, where through a Sri Lanka – China FTA many Chinese manufacturing industries could shift to Sri Lanka, and by the use of Sri Lanka -India FTA it could enter the huge Indian market with growing demand. Apart from this, during the economic crisis under the influence of providing much-needed help for Sri Lanka, India managed to establish a ‘Maritime Coordination Center across the island with a US$ 6 million grant from the Indian government. India will also provide three Dornier Maritime Surveillance Aircrafts to Sri Lanka and a 4,000MT floating barge to the Sri Lankan Navy, also agreed to invest US$ 300 million to set up a Unitary Digital Identity Framework in Sri Lanka. As These strategic agreements go forward, India has agreed to provide US$436 as grants and another US$ 2.17 billion as lines of credit during this year.
Conclusively, it’s clear that the current economic crisis in Sri Lanka has put the Chinese BRI in Sri Lanka in a vulnerable position, this is due to the lack of proper risk management, feasibility study, and recovery initiatives. Also, during this crisis, Sri Lanka lost its balance between India and China and deorbited China.
