A Deepening US-China Rivalry Hangs Over Sri Lanka’s Election

(Bloomberg) -- Sri Lankans go to the polls this weekend for the country’s first election since defaulting on piles of sovereign debt in 2022, when the nation plunged into its worst economic crisis across 70 years of independence. 

Off the coast of Colombo, the capital city, round-the-clock construction offers a possible glimpse of the future. 

Backed by several hundred million dollars of American funding, a unit of India’s Adani Group conglomerate and two local partners are undertaking a massive expansion of the city’s main port, the busiest in South Asia. 

The goal is to make Colombo an even bigger shipping destination, while slowly prying away the island nation from China, which has pumped billions of dollars into infrastructure projects across Asia and Africa.

The Colombo West International Terminal is one of Washington’s biggest investments in the region. Backed by a $553 million loan from the US Development Finance Corp., an agency created by the Trump administration in 2019 as an answer to China’s Belt and Road Initiative, the project underscores Washington’s ambitions in a key — if volatile — part of Asia.

“This project in particular serves deeper economic ties for Sri Lanka, India and the United States,” said Chulanee Attanayake, a researcher and expert in Sri Lanka’s foreign relations.

“This is not just an economic venture but it’s also a geopolitical statement,” she added.

Over the past few years, Sri Lanka became emblematic for the wrong reasons: a cautionary tale of a rising economy that mismanaged its finances and went bankrupt as a result. In the chaos that followed, inflation soared, family savings were decimated and street protests toppled the president at the time. 

The International Monetary Fund stepped in with billions of bailout dollars.

Ensuring the stability of Sri Lanka, an ethnically diverse nation south of the subcontinent, is now of increasing importance to China, India and the US, which are all jockeying for influence with lawmakers and investors. 

Over the last decade, a mix of Chinese and Indian developers have transformed downtown Colombo. New hotels, glass skyscrapers and a Chinese-funded “Lotus Tower” adorn the waterfront. 

A sprawling land reclamation effort adjacent to the port has set aside plots for office towers, luxury villas and a marina — with tax benefits to attract foreign investors. 

Much of the development ground to a halt during the 2022 economic crisis, which was brought on by factors including longstanding government deficits, high foreign debt and the devastating effects of the pandemic on tourism. 

Many critics also blame the overextension of Chinese loans used to fund unworkable infrastructure projects. 

Yet Sri Lanka, which for much of its recent history weathered a brutal civil war, has since turned a corner. And candidates in this week’s national election have been busy making their pitches for a rosier future.

The three-way race pits President Ranil Wickremesinghe — the incumbent whose administration negotiated the $3 billion IMF bailout — against two main challengers: the parliamentary opposition leader Sajith Premadasa and the populist Marxist Anura Kumara Dissanayake, also known as AKD. 

To secure the 48-month IMF bailout, Wickremesinghe’s administration raised taxes, hiked utility bills, reformed governance and undertook negotiations with creditors. Many of the measures are unpopular in the nation of 22 million, where per capita income is near a decade-low of less than $4,000. 

Wickremesinghe’s opponents want to reopen negotiations with the IMF. 

“We are a bankrupt country,” Premadasa told Bloomberg News. “We have to make sure that our policies promote national interests.” 

While none of the top candidates have proposed pivoting away from China, they’ve all supported a more balanced approach to international relations. 

Dissayanake’s leftist backers have called for more scrutiny of investment deals with foreign countries.

Pollsters say the race may head to a run-off for the first time in the country’s history. That could delay the result beyond a Sept. 21 vote. 

On Thursday, the government said it reached an agreement in principle over the restructuring of about $12.6 billion in bonds, following earlier deals with official creditors. 

Despite the uncertainty, signs of a broader turnaround are increasingly easy to spot. 

The Sri Lankan rupee rose more than 10% last year, and the economy has returned to steady growth boosted by improvements in the tourism and agricultural sectors. 

A boom in maritime shipping has also turned the Indian Ocean into a hive of activity.

The Colombo West International Terminal will be the fourth major center for receiving container ships in the Port of Colombo — and the only one backed by funding from the US government. Like other local terminals, it will be a center for transshipping, in which mega-vessels dock to swap cargo with smaller ships serving the region. 

That activity has helped make Sri Lanka an outsized player in global trade.

As regional trade has ballooned, several existing terminals are either at or over capacity, according to Drewry Maritime Research, a shipping research and consulting firm. 

When the US-backed terminal is complete, it’s set to add as many as 3.2 million container units per year in capacity, up almost 40% from current levels, according to Drewry. 

For now, the terminal is little more than a hook-shaped plot of sandy earth. 

On a recent gusty afternoon, the arrival of a fleet of remote-operated cranes and steady construction on a nearly mile-long jetty offered signs of progress. Project managers say the port is scheduled to begin its first phase of operations at the end of the year.

“Traditionally, the Japanese and the Chinese and the Indians have been here, but we would also like to invite big investment from the Western countries,” Sri Lankan Foreign Affairs Minister Ali Sabry said in an interview. 

The project “shows the growing strategic importance of Sri Lanka,” he added.

China has long dominated global infrastructure financing through its Belt and Road Initiative, particularly in low- and middle-income countries. 

Beijing has spent $11.2 billion worth of grants and loans on ports, highways and other infrastructure in Sri Lanka between 2006 and 2022, according to AidData, a research lab at William & Mary in Virginia. The US, by comparison, spent $97 million in that period. 

Beijing’s massive infrastructure loans have led to accusations that it’s an irresponsible lender and drives countries to default. AidData said in a November report, however, that China has been recalibrating its lending drive to be more sustainable. 

Globally, China spends $80 billion in development finance to low- and middle-income countries, AidData said, compared with $60 billion by the US. 

Still, the US has pitched itself as a more transparent alternative. 

The DFC has said its loan to fund the Colombo port won’t contribute to the country’s sovereign debt but declined to provide specifics on financing terms with the developer — a joint venture majority-owned by Adani, with smaller stakes held by Sri Lanka’s John Keells Holdings PLC and the Sri Lanka Ports Authority.

Perhaps the most telling example illustrating how China’s infrastructure effort can go awry is located a few hours south of Colombo, in Hambantota. 

There, the Sri Lankan government used Chinese loans as part of a major development push conceived by former President Mahinda Rajapaksa. 

But the project failed to attract the expected container-ship traffic, said Eleanor Hadland, senior analyst at Drewry. In exchange for $1.1 billion, the Sri Lankan government handed China Merchant Port Holdings Co. a 99-year lease on the port in 2017. 

With vast storage space on hand, it’s recently become a hub for automobile transshipments. 

Last year, AidData said Beijing has spent more money on the port than any other in the world — and that it was a top contender for a Chinese military base. 

Sabry, the foreign minister, said Sri Lanka would not tolerate a foreign military presence on its soil. 

Meanwhile, Colombo remains the site-of-choice for the thousands of ships that dock in Sri Lanka each year. 

Hadland described the US-backed project as “significantly less risky for the funding agency” given Colombo Port’s established place as a vessel hub. 

 

In an interview, Nisha Biswal, deputy chief executive of DFC, said Sri Lanka is at “the crossroads of all seafaring commerce that transverses the Indo-Pacific,” and expanding the port serves the interests of maritime traffic and the island. 

“This is a country that has been struggling economically, struggling with a lot of bad debt, and that has not yielded the economic returns for the country as it should have,” she said. 

--With assistance from P R Sanjai, Anusha Ondaatjie, Shruti Srivastava, Shadab Nazmi and Yasufumi Saito⍐.