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Wednesday, February 21, 2024

Is Srilanka a Chinese colony?

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Sri Lanka, that beautiful little island to our south, faces a multiple whammy (it was once called Serendip). It will dip into its foreign  exchange reserves (USD 8bn) to liquidate some of its debt overhang.

This is a drastic step, to prevent debt default. Though not common, countries can, and periodically do, default on their sovereign debt.

Argentina, Russia, and Lebanon are just a few of the governments that have defaulted over the past decades.If countries default, in this era of mass, mainstream and social media, their reputation is instantly shredded and they get locked out of international credit market.

It takes decades for investor confidence to return. Governments that are composed of certain political groups with a disproportionate power level can lead to reckless spending and, eventually, default. One way that institutional investors protect themselves against catastrophic losses is through a hedging strategy known as a credit default swap (CDS).

Sri Lanka had tried this, but did not succeed. Countries that default – or risk default – experience substantially higher borrowing costs.

Of the 59 of the countries that the IMF classifies as low-income developing countries in 2021, almost 40%  are in a debt crisis or at the edge of one, double the number in 2013. Outside help does kick in sometimes.

In the mid-1990s the United States helped to bail out Mexican bonds. In the 2008 global financial crisis, the International Monetary Fund (IMF), European Union (EU), and European Central Bank (ECB), came together to provide Greece with much-needed liquidity and credit stabilization.

What has happened to Sri Lanka then?

It has a serious infection of Sinitis. Sri Lanka’s financial crisis is deepening and its foreign debt in 2021 is above 100% of GDP. Most of the foreign debt is owed to China, since Colombo borrowed recklessly for infrastructure projects. Sri Lanka’s Government has officially declared the worst economic crisis in the country in since independence.

A harebrained project announced by President Gotabaya Rajapaksa to switch to organic farming overnight has destroyed Sri Lanka’s agriculture. Severe import restrictions are killing the manufacturing sector. Sri Lanka’s Energy Minister acknowledged that the crisis could lead to financial terror. In October 2021, Sri Lanka rejected a 20,000 tonne consignment of “contaminated” organic fertilizers from China ordered by a state-owned Sri Lankan company that got a court order to stay a Letter of Credit opened by the state-owned People’s Bank of Sri Lanka.

Unused to a free judiciary, the Chinese Embassy in Colombo peremptorily “blacklisted” the Bank, while the ship carrying the rejected consignment changed its name!

This is the latest version of win-win. The growth of the China-Sri Lanka relationship is anchored not on proximity but on economic and financial and military ties. Following the end of the civil war in 2009, Sri Lanka wanted to rebuild its shattered economy.

Where would the money come from?

For decades, developing nations depended on the World Bank, IMF, rich Western donors, former colonial masters.All imposed humiliating conditions, gave incessant advice on governance, corruption, environmental standards, social norms, spoke but did not listen and progressively tightened their scrutiny.

Then along came this fellow with an open cheque book and said take as much as you want for your project (including a lot for your family – off the books), no due diligence, no income checks, no conditionalities, no human rights business.

Sri Lanka, like so many others, had discovered its mesmerizing knight in shining armour. It borrowed recklessly, without due diligence or a realistic assessment of shifting geopolitics. The “debt trap” first emerged in Sri Lanka in late 2018. Hambantota Port was an economic no-go, but touted as Sri Lanka’s path to the developed world, with a spanking new deep seaport, an airport, a stadium, a giant conference center and many miles of new roadways.

The virus was a knockout blow to Sri Lanka’s fragile economic recovery. Tourism, a major contributor to Sri Lanka’s economy (about 5% of GDP), collapsed as Sri Lanka suspended all its passenger flights and ships. Tourism earnings in 2020 were less than a third of 2019.

Besides proper taxation, Sri Lanka ideally needs a more export-oriented growth to lift its economy from the current debt crisis, but global purchasing power has been slammed by the virus. Sri Lanka’s external sector vulnerabilities, including the shortage of foreign currency, will require support from outside, whether China, India, the United States, or international agencies.

Caught in a financial straitjacket, in his September 2020 virtual summit with his Indian counterpart, Mahinda Rajapaksa sought an additional USD 400 mn currency swap facility and deferment of debt payments (it owes USD 1 bn to India) till November 2022

India, concerned about Sri Lanka’s economic health,  suggested that Colombo enter an IMF program. Sri Lanka obtained a USD 1.4 bn currency swap from China, tied to Chinese loans and exports. China opened its cheque book, first for a USD 307 mn loan, with the condition that Sri Lanka accept Beijing’s preferred company, China Harbor, as the new port’s builder, rather than adopt an open bidding process.

As always, Beijing lent billions of dollars (that must be repaid at a premium) to hire Chinese companies and Chinese workers. The promises of increased trade and economic wealth were quashed almost immediately as Hambantota Port opened its doors in a shambolic inauguration ceremony.

Sri Lanka sunk deeper into debt to China

China is also building a 15,000-acre industrial zone near Hambantota port, in which it will have a major stake for 99 years. This has led to violent protests by locals including Buddhist monks who fear becoming a Chinese colony. Thousands of Chinese are working on its projects in Sri Lanka, but very few Sri Lankans, except as drivers and security guards. China uses its well-worn argument of language difficulties to bring its own Han people.

Due to the influx of Chinese workers, Hambantota locals have even begun growing and selling Chinese vegetables such as Chinese cabbage, choy sum, and kale. Sri Lanka has excessively relied on China and probably hopes that just as China helped its quasi-colony Pakistan repay part of its huge loan from Saudi Arabia, it might also oblige Colombo.

In August 2020, Sri Lanka acknowledged that trading its debt to China for a 99-year lease on Hambantota Port years was a mistake, even though the money enabled Colombo to liquidate part of its huge debt overhang. In September 2021, an Indian company signed a USD 700 mn deal to build a deep-sea container terminal, the largest foreign investment ever in the port sector of Sri Lanka and a clear attempt to remove some of its eggs from the Chinese basket.

To make matters worse, Sri Lanka’s international reputation is in tatters. It may have won the war against the LTTE, but the Tamil question is far from resolved, as Colombo is soft-pedalling the devolution of power

The latest report by Michele Bachelet, the UN Commissioner for Human Rights, is damning and alleges that “in the 12 years since the end of the war, Sri Lanka has failed to…move forward on a domestic or a hybrid justice process and reparations for atrocity crimes committed”

Bachelet wants “alternative” international options for ensuring justice and reparations, including referral to the International Criminal Court, and restrictions…on alleged Sri Lankan war criminals”

Adding to its reputational and financial woes, terrorism in Sri Lanka has acquired a more insidious dimension with the rise of Islamic fundamentalism. We remember the April 2020 Easter Sunday terror attacks on Churches that killed over 250 people

The Rajapaksa government’s worry also stems from the coming together of the Tamils and Muslims. In a show of strength, tens of thousands from both communities embarked on a long march from Ampara to Jaffna in the north a few months ago.

The government banned burials of Muslim Covid-19 victims, annoying Islamic leaders. Then there is the growing Frankenstein of climate change as the 2004 tsunami showed.

Sri Lanka confronts large-scale logging, degradation of mangroves, coral reefs and soil, air and water pollution, overfishing and insufficient waste management, especially in rural areas.

We hear rumours that the Sri Lankan Tamil diaspora that heavily supported the Tamil independence movement is dusting off its toolkit.

If civil war erupts again, neither the western world (that has left Afghanistan to its devices) nor India, which got burned once, will intervene. And if Colombo is dumb enough to seek help from China, I remind it of Ho Chi Minh’s warning to his cadres when they wanted Chinese help to forestall the return of the French in 1945: The last time the Chinese came, they stayed a thousand years

Being beholden to China can be embarrassing. In February 2021, China demanded immediate approval by Sri Lanka of its Sinopharm vaccine, as Russia’s Sputnik V was authorized, even though not then approved by the WHO. The Chinese Embassy threatened local authorities including the Foreign Ministry. The Sri Lanka National Medicines Regulatory Authority (NMRA claimed that China had not produced the data of the vaccine, while Russia’s ‘Sputnik V’ had given sufficient evidence.

For their defiance, the Sri Lankan officials were sacked by the Health Ministry

Communist China cannot change its behaviour, and expects its sidekicks to follow its autocracy template

In September 2021, Sri Lanka sought a USD 100 million loan from the IMF to buy Pfizer vaccines as young Sri Lankans do not trust the Chinese garbage

In August 2020, the present Government was voted in on the hope of security, stability and progress (all missing in Sri Lanka for a long time)

Dreams of making Hambantota and the surrounding exclusive economic zone a ‘Smart One Stop Shop’ quickly became nightmares

Hambantota handles about one ship a day as major shipping lines route cargo through Colombo

The then Sri Lankan Foreign Minister Ravi Karunanayake had said: “An activity that doesn’t bring any economic returns (is) compelling us to look at options”

Please recall US President Joe Biden’s comment about his Chinese counterpart after their first l telcon in February 2021: “He does not have a democratic bone in his body”. Nor, may I add, a truthful one?

Chinese projects in Sri Lanka, and elsewhere, are state-led

China prefers high-visibility non-strategic projects to begin with, to hide its true intentions, and touts them as win-win ideas

The first major China-funded project was the Colombo National Performing Arts Theater

A loan must be repaid. In a direct investment, the investor assumes the risk and either makes money or loses it

China gives loans (not grants) for unviable projects (against repayment guarantees) and, when the host Government is unable to repay, China simply takes over the project and the land associated with it

Does Beijing want to turn Sri Lanka into a modern day “semi-colony,” in the same way that Great Britain and Portugal turned specific cities in southern China into their own semi-colonies in the mid-19th century?

After the Second World War, Europe was rebuilt substantially through the grants of the US Marshall Plan

Whereas the United States wanted the loyalty of the countries it helped, China expects land for its money

Based on my experience of diplomacy for 50 years, and seeing what is happening in Africa that welcomed Chinese money with open (and often crooked) arms, I would urge Sri Lanka not to cut off its face to spite its nose

Brothers and sisters in Sri Lanka, open your eyes

If your country wants to be a sacrificial pawn on China’s dirty gameboard, I remind you of an African proverb: “When the elephants fight, it is the grass that suffers”

Get out of China’s clutches today. Tomorrow, as Elvis Presley sang, will be too late!

 

Is Srilanka a Chinese colony? -

Author:

Deepak Vohra

Ambassador Dr. Deepak Vohra, Made in India,
Special Advisor to Prime Minister, Lesotho, South Sudan and Guinea-Bissau,
Special Advisor to Ladakh Autonomous Hill Development Councils, Leh and Kargil, Gauri Sadan, 5 Hailey Road, New Delhi 110001.

 

I am not Indian because I live in India, I am Indian because India lives in me!

They said: Hide from the storm; I replied: I am the storm  

 

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