Sri Lanka is stuck in a vicious cycle of Chinese debt

Sri Lanka has become a case study for how China’s economic investments can be used for geopolitical leverage

Since Colombo joined the Belt and Road Initiative (BRI), the Sri Lankan debt problems have become intense and paved the way for concrete Chinese inroads in South Asia. The end plan of Chinese investments has been increasingly clear since 2017 when Sri Lanka leased its Hambantota port to China in lieu of failure of repayment of loans. Today, China holds more than half of Sri Lanka’s $46 billion external credit. The situation became further problematic when Colombo’s economy faltered in 2022, and it had to go to the International Monetary Fund (IMF) for a bailout.

Since then Sri Lanka has been working towards resolving the existing debt problem, however, in Colombo’s case the solution and problem both seem to be Beijing. In October, Sri Lanka managed to conclude an agreement with China’s Export Import Bank (EXIM) to restructure debt worth $4.2 billion. A month later, Colombo has also approved an oil refinery proposed by Chinese Sinopec worth $4.5 billion, making it one of the largest investments in the last few years. This should be seen in context with Chinese President Xi Jinping’s assertion that Beijing’s help comes with “no strings attached”.

Sinopec is a State-owned company which has been very keen to extend its investments to other nations. It has presence in Saudi Arabia and Russia, and this deal has the capacity to give it access to the South Asian market. Sinopec has also been supplying fuel to the marine bunker at Hambantota since 2019.

Such investments are essential for Sri Lanka to support its deteriorating economy. Last year saw the country on the brink of economic collapse. The Chinese debt restructuring and the Sinopec investment both can help Colombo in the long run. However, it is quite clear that Chinese investments do not actually come with ‘no strings attached’. The Chinese money might make it easy for Sri Lanka to gain access to the promised IMF loans, but will it help Sri Lanka stand on its own two feet is the larger question.

In addition to this, Sri Lanka has also announced that it will be rolling out visa free entry for 30 days to Chinese and Indian citizens. Sri Lanka has also extended visa free entry to citizens from Malaysia, Thailand, Japan, Indonesia, and Russia. A major step to re-establishing the tourism sector which has been struggling since the outbreak of Covid-19.

Sri Lanka today has become a case study for how Chinese economic investments can be used for geopolitical leverage. Even though Beijing has been ready to restructure the debt it has also extended a matching investment. The fact that the investment by Sinopec will be a part of the BRI and boost it when it is facing global flack can be beneficial for Beijing. China has access to almost every aspect of Sri Lanka’s economy in the form of major investments. The fact that Beijing owns more than half of Sri Lankan debt provides it with crucial leverage.

Today Sri Lanka appears to be stuck in a vicious circle of attempting to get out of debt while further getting entrenched. The idea of getting ‘help’ from China to strengthen its economy comes at the cost of leveraging more access to Beijing. Today Beijing has access to a port and the land around it, large debt, and an oil refinery in Sri Lanka. Couple this with the geopolitical aspirations and it is clear that going ahead Colombo will be getting increasingly under Beijing’s control.

This is not to undermine the efforts undertaken by the Sri Lankan government; however, the reality of Chinese debt and influence cannot be ignored. The weakened and slowed economy has made investment in Sri Lanka unattractive for other countries — at least in the short term, while Beijing is ready to pump the required money as it understands the leverage which Colombo provides for its geopolitical aspirations.

(Gunjan Singh is Assistant Professor, OP Jindal Global University.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.