25 January 2022, NIICE Commentary 7613
Nikhil Sahu
Sri Lanka is going through its worst economic crisis ever. Inflation is skyrocketing, directly affecting the general public of Sri Lanka. The situation has reached such a stage that the island country had to impose a complete ban on several imported items to maintain the level of its foreign exchange reserves. As foreign funds continued to plummet amid money printing and crippled currency markets, Moody’s Investors Service cut Sri Lanka’s sovereign rating to Caa2 from Caa1, pushing the country’s credit into speculative territory. In such circumstances, the possibility of investment becomes significantly less. However, there is no single reason for this economic condition of Sri Lanka, nor can the blame be put on the economic and political decisions of a single political party. The reasons are historical.
The civil war, which lasted for almost 30 years, had a lasting and grave impact on the country’s economy. As a direct consequence of the war, the environment became unfavorable for economic activities, discouraging the global investors from investing in the unstable region. According to a report, during the Civil War, about 5.3 percent of its GDP was spent by the government on defence-related works. During this period, the GDP of Sri Lanka also continued to grow at a slower pace. In the late 2000s, the Civil War reached its final phase. Simultaneously, the exercise of making Sri Lanka an economic hub and tourism hub of South Asia by the Rajapaksa government started rapidly. The results were soon visible. Where the tourism sector’s contribution to GDP was only 6 percent in 2000, it jumped to more than 12 percent in 2019.
On the other hand, Sri Lanka invested much money to accelerate economic activities and develop economic activity centres. This amount was received from different banks and friendly countries with varying loan terms. Sri Lanka started working on the Chinese model to increase connectivity and attract investment in the country.
In this context, for the first time in the year 2008, the plan of developing Hambantota Port located in the south of Sri Lanka by Chinese companies was chalked out by Sri Lanka. This port is located in the middle of the world’s busiest sealed lane routes. For this purpose, a large amount of loan was obtained from the Chinese Exim Bank in Sri Lanka with confidential terms. Due to various reasons, Hambantota Port has not achieved its actual capacity and the expected return. As a result, 70 percent stake of the Hambantota Port port was leased to China Merchants Port Holdings Company Limited (CM Port) for 99 years for $1.12 billion.
On the other hand, Colombo Port City Project was proposed by the Rajapaksa government to make Sri Lanka an economic hub. The plans were to develop this port city into an economic hub like Hong Kong and Singapore. Also, a special bill was passed by the Sri Lankan Parliament to make the proposed Special Economic Zone in Colombo more globally competitive. It is worth noting that since its inception, the Port City project has been making headlines due to its irregularities. Opposition party leaders and other analysts believe that the bill’s provisions are unconstitutional and would make the country a veritable “Chinese colony”. It is also important to note that almost all the work related to the Colombo Port City Project is being done by Chinese companies only. This shows the influence of China in Sri Lanka.
Hambantota and Colombo Port City were initially portrayed as two engines of development by the Sri Lankan government, but now China is driving one of these two engines. China has also invested $ 1.4 billion in Colombo so far; a Chinese investment of $ 13 billion is proposed in this project in the coming times. The question that must be answered here is how much Sri Lanka will be able to repair this huge debt. In fact, the situation has come to such a point that Sri Lanka has only USD 1.6 billion forex reserves left for imports, and it needs about $ 7.3 billion for debt repayment within the next financial year. It will not be an exaggeration to say that in the coming few months, Sri Lanka will be on the verge of bankruptcy.
At present, Sri Lanka’s agriculture sector is also going through a crisis. In June 2021, 100 percent organic farming was planned by the government, and Sri Lankan Authorities imposed complete restrictions on the import of chemical fertilizers to implement this plan. As a result, there was a decline of more than 50 percent in the production of food grains in a short time. In view of this, the intermediaries started black marketing. Unfortunately, this led to skyrocketing prices of basic food items used on a daily basis. To stop this black marketing and to deal with the economic situation, an economic emergency was declared in September 2021 by the government. The weak position of Sri Lanka’s economy is reflected in the fact that the inflation rate in Sri Lanka was 9.9 percent in November 2021, which reached 12.1 in December 2021 in the very next month. The measures taken by the government for agricultural reforms proved to be very harmful. The Sri Lankan economy is under extreme pressure due to the Corona pandemic. According to a World Bank report, about 5 lakh people may come under the below-poverty line category in Sri Lanka in the coming times.
While it is not necessary to look at every incident in Sri Lanka through a Chinese lens, however it also cannot be denied that China has no hand in the current situation in Sri Lanka. First of all, there was no transparency in the loan taken by Sri Lanka from China, as well as it is well known that the Chinese government has become deeply involved in Sri Lankan politics. China has used its economic clout strategically to push India and other powers back in the Indian Ocean region. It is very important for Sri Lanka to improve its economic management as well as adopt balanced behaviour in its foreign policy. Sri Lanka’s over-inclination towards China is not only threatening its sovereignty but also affecting the equations of the region, with the biggest impact being on bilateral relations between India and Sri Lanka, which have traditionally been strategic partners.
Nikhil Sahu is Research Intern with NIICE.
