India’s Foreign Policy Progress in Sri Lanka is a Strategic Setback for China
Since an economic crisis hit the country last year, New Delhi has reminded Colombo who its real friends are.
It was only a year ago that Sri Lanka dominated international headlines, as its worst economic crisis in more than 70 years contributed to severe domestic strife, including deadly riots, and severe shortages of fuel, food and critical medicine. The crisis was created by a confluence of domestic policy blunders under the Rajapaksa clan, on whose watch Sri Lanka’s burden of foreign debt had grown to nearly insurmountable levels, a significant proportion of it owed to Chinese creditors.
Sri Lanka’s economic troubles had been known for some time, but the Rajapaksas were unwilling to seek assistance from the International Monetary Fund (IMF). The source of the trouble came not only the inability to service debt due to limited foreign reserves, but economic mismanagement from legitimacy challenges that compelled the government to implement tax cuts to curry favor with the public. The result is that everything that could go wrong with the economy has: Sri Lanka faces budget and current account deficits, hyperinflation, a devalued currency and massive sovereign debt.
For neighboring India, Sri Lanka’s crisis prompted severe strategic anxiety. Over the past decade, Chinese influence on the island has increased, as after the long civil war drew to a close – in part due to China’s weaponry – Mahinda Rajapaksa began borrowing heavily to pay for the war. The relationship between New Delhi strained by an Indian peacekeeping mission in the late 1980s and a number of votes by India at the U.N. Human Rights Council after the war put pressure on Sri Lanka to be held accountable for its actions and to promote reconciliation with the island’s Tamil minority population. China seized the opportunity to undermine India’s sphere of influence over Sri Lanka, partially through satisfying Mahinda Rajapaksa’s penchant for vanity and pet projects.
A prime example of the Rajapaksa-era obsession with infrastructure projects was the 99-year lease of the strategically-located Hambantota Port in 2017 to the Chinese state-owned China Merchants Port Holding Company for $1.1 billion. Sri Lanka secured loans from Chinese banks to develop the port in hopes of relieving some of the shipping burden on the country’s main port in Colombo. Only the new port failed to generate the much-needed revenue. The Rajapaksa government eventually collapsed under the weight of its debt burden to both Beijing and another $25 billion in debt to private bondholders.
