Sri Lanka’s economic crisis: How China’s intervention poses a threat to India

Sri Lanka is facing its worst economic crisis in decades. The country is struggling to pay for essential commodities after a 70 per cent drop in foreign exchange reserves over two years, triggering a currency devaluation. Fuel supply shortage, power cuts and the rising prices of essential goods have cause widespread protests. The Sri Lankan government has a USD 4 billion foreign debt, including a USD 1 billion international sovereign bond that matures this July.

This week, India’s foreign minister, S. Jaishankar, visited Sri Lanka in a show of support. The objective being to try and pry it away from a decade-long Chinese embrace. Experts say that it is a ‘strategic trap diplomacy’ that has been inflicted on Sri Lanka by China. The Chinese influence is increasingly becoming a threat for Asian countries including India, and thus, a good opportunity for New Delhi to counter Beijing’s influence over Colombo.

China has made huge investments under the Belt and Road initiative in neighboring countries. The program started in 2013 for building ports, roads, railways, pipelines and other infrastructure. However, in Sri Lanka, it took over one strategic port due to the non-repayment of loan by the government.

On Tuesday, New Delhi won a small yet significant victory when it wrested away a power project, which was earlier granted to China. Additionally, India is also trying to undo China’s alacrity to provide financial help to Sri Lanka by offering a USD 1.5 billion credit line to buy essential commodities. Since January, India has offered a USD 2.4 billion currency swap, loan deferment and credit lines to Sri Lanka.

At present, Sri Lanka is suffering from a food, milk, medicine and other essential commodities supplies shortage and the inflation has surged past 17 per cent. The power cuts have become common and the country has decided to switch off street lights at night to save electricity.

India and Sri Lanka are maritime neighbors, and any instability in the Sri Lankan economy would also effect India. Nearly a dozen of refugees have arrived on India’s coast by boats and is estimated to reach 2,000 in the coming days.

From 2000 onwards, Sri Lanka adopted Chinese model of infrastructure-led growth considering that it would generate jobs and grow their economy, and between 2006- 2019, China invested USD 12 billion in Sri Lanka’s infrastructure development. The large scale Chinese infrastructure loans has landed Sri Lanka in a strategic debt trap even as the country struggles with debt restructuring.