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Sri Lanka, with its unique position in the center of the Indian Ocean, is the focus of widespread conjecture in recent strategic discourse. With China’s growing prominence in South Asia through efforts such as the Belt and Road Initiative, questions abound in the strategic community as to whether Colombo will eventually host a Chinese military base. Given the implications of such a move, it is helpful to think about Sri Lanka across geostrategic, regional, and national levels to understand its place within the wider Indo-Pacific.

At the geostrategic level, Sri Lanka can draw on its experience from the Cold War of navigating great power politics. Within South Asia. It is accustomed to being the weaker actor in an asymmetric relationship with India but has the opportunity to strengthen its relationships with regional countries. Sri Lanka’s biggest challenge is at the national level, where it is confronting a worsening economic crisis.

Sri Lanka’s geostrategic position

Many observers today view Sri Lanka primarily through the prism of Sino-American competition. The dynamic of great power competition is nothing new for Sri Lanka as a small state, and the Indian Ocean region more broadly, even if the actors involved have changed over time. During the Cold War, the Soviet Union and India were seen as partners on one side, with the United States and Pakistan opposing them. Governments in Colombo were forced to learn to navigate the tensions between these two sides to avoid being drawn into U.S.-Soviet competition and the regional rivalry between India and Pakistan — especially with the threat of negative diplomatic and military consequences from India.

For example, in the 1970s, Sri Lanka proposed an Indian Ocean Zone of Peace at the United Nations to voice concerns about the great powers expanding their military presence in the Indian Ocean. While the General Assembly adopted this resolution, great power politics persisted in the Indian Ocean. With new leadership in Colombo, Sri Lanka began deepening diplomatic and economic ties with Washington. By the 1980s, this outreach had only served to heighten tensions with New Delhi.

During the Cold War, the United States was the major extra-regional power of concern for India in its neighborhood, seen most notably in 1971. Today, China occupies that role for New Delhi, which now views Sri Lanka’s growing relations with Beijing with concern. The revival of the Quad arrangement with the US, India, Japan, and Australia has made the wider strategic environment within the Indian Ocean even more complex to navigate from Sri Lanka’s perspective.

Sri Lanka in South Asia

From a regional viewpoint, although Sri Lanka’s relations with India tend to attract the most attention from analysts, its links with the smaller South Asian (SSA) countries — Bangladesh, Nepal, Bhutan, and the Maldives — are also growing in importance. All five SSA countries have an asymmetric relationship with India in terms of population, economics, and military power, and are often the weaker actors in bilateral relationships with New Delhi. Sri Lanka needs to continue expanding its relations with these fellow SSA countries to spur a regional balance.

A recent example is Sri Lanka’s much-needed currency swap of USD $250 million from Bangladesh. Fifty years into independence, Bangladesh is marching toward graduating from the UN’s least developed country (LDC) status and has plenty of foreign exchange reserves in its coffers. High remittances from nationals working overseas and high exports from the garment industry globally have contributed to this success. These economic gains have enhanced the country’s standing in South Asia, which has grown to include the provision of disaster relief to SSA countries such as Sri Lanka and the Maldives. Given Bangladesh’s example of rising economic success, as well as building disaster resilience against recurring cyclones and floods in the Bay of Bengal, Sri Lanka can learn from Bangladesh and focus on proactive national development.

Given Bangladesh’s example of rising economic success, as well as building disaster resilience against recurring cyclones and floods in the Bay of Bengal, Sri Lanka can learn from Bangladesh and focus on a proactive national development.

Partnerships between SSA countries that include India as a partner nation are also emerging. The maritime security trilateral arrangement that began a decade ago between Sri Lanka, Maldives, and India has recently been rejuvenated. It increasingly looks ready to expand membership to include Bangladesh. Building out these relations, as well as learning lessons from Bangladesh’s increasing economic success, remains an underdeveloped opportunity for SSA countries such as Sri Lanka to address the challenges of integration in South Asia and diversify their options beyond India and China.

Challenges within

Sri Lanka confronts its greatest challenges at the national level. Even before the COVID-19 pandemic, it was facing significant economic challenges as a lower-middle-income country, including a high debt-to-GDP ratio, low foreign exchange reserves, and accelerated debt repayment schedules to multilateral development banks. In 2017, Sri Lanka leased operations of its Hambantota Port for 99 years to a Chinese-majority joint venture for the FDI to alleviate a crisis in its balance-of-payments situation.

The pandemic has exacerbated this economic situation further, extending to the current food crisis. Travel restrictions and lockdowns have devastated the lucrative tourism industry. The influx of foreign currency from tourism is necessary for Colombo to manage its debt service obligations to both the Asian Development Bank and World Bank, as well as sovereign bonds that mature within short timelines. Its debt-to-GDP ratio has steadily climbed to an estimated 101 percent, with roughly USD 4 billion due annually for the next few years. For a country that prides itself on never having defaulted on a loan in its history, Sri Lanka appeared to come very close to this scenario in 2021. It is increasingly relying on international sovereign bonds, as well as loans from China and currency swaps with India and China, to address its insufficient foreign exchange reserves.

Moreover, growing security threats have also commanded the government’s attention over the past three years. In April 2019, churches and hotels were targeted in a series of fatal bombings on Easter Sunday, revealing the existence of ISIS-inspired terrorist networks within the country. The suicide attacks were jarring after a decade-long lull in high-profile terrorist incidents following the end of Colombo’s war against the LTTE insurgency in 2009. The last two years have also witnessed environmental crises. The New Diamond oil tanker caught fire in 2020 with an associated leak of diesel fuel. In a more devastating incident earlier this year, the X-Press Pearl, a container ship carrying chemicals, caught fire and eventually sank. These disasters have caused untold damage to the ecosystem that will take years to assess and underscore the wider environmental threats posed by sea lanes to an island nation that depends on the maritime domain and its location for connectivity.

Looking ahead

Going forward, Sri Lanka will need to navigate great power competition between Beijing, Washington, and New Delhi much as it did during the Cold War. Doing so will once again require carefully minding its asymmetric power relationship with India. To diversify its options, Sri Lanka needs to pay more attention to cooperation with other SSA countries to better leverage the prospects for greater development and connectivity. Colombo can intensify its debt management strategy in coordination with multilateral development banks such as the World Bank and Asian Development Bank. It can also connect with SSA partners such as Bangladesh and the Maldives in a systematic way to hear their lessons learned on what to do — and what not to do — in terms of how these fellow middle-income countries pursued their debt management approaches. Once Colombo stops facing recurring moments of crisis in its balance-of-payments situation, it will have achieved a more sustainable approach to national economic management.

Outreach to address COVID-19 economic distress perpetuates the inaccurate perception that Sri Lanka is heavily indebted to China and is therefore prone to advancing Beijing’s geostrategic ambitions.

However, Sri Lanka’s most difficult task lies at the national level, where it is struggling to manage a mix of economic, health, environmental, and internal stability challenges. A complicating external factor is the continued scrutiny at the UN of the government’s conduct in the final stages of the war in 2009 and concern about the recent trend of weakening human rights protections. Besides the implications for internal stability, these issues have ripple effects on the economy, such as the European Parliament’s call in June 2021 to withdraw the Generalized Scheme of Preferences Plus (GSP+) status for Sri Lanka. Withdrawal of this preferential access to European Union markets would limit Sri Lanka’s trade exports, thereby impeding a critical source of national income – especially for paying off its international debt obligations.

Sri Lanka’s willingness in the COVID-19 era to request financial assistance from China via currency swaps and loans also compounds challenges at the national level. Beforehand, observers did not see Colombo requesting reactive, financial assistance from China to address wider economic woes, but rather project assistance for proactive, development purposes. Outreach to address COVID-19 economic distress perpetuates the inaccurate perception that Sri Lanka is heavily indebted to China and is therefore prone to advancing Beijing’s geostrategic ambitions. Examining external debt, China accounts for only about 1012 percent of Sri Lanka’s obligations. Diversifying its partners will therefore help mitigate the potential to become too dependent on one country.

An encouraging trend in Sri Lanka’s ongoing development is cooperation with South Korea via a USD 500 million concessional loan. South Korea is emerging as a key trade and development partner for other SSA countries, suggesting an alternative avenue for Sri Lanka to pursue its long-term economic strategy. Another positive development, and source of diversification beyond China or India, is the decision to accept USD 787 million in relief from the International Monetary Fund. Although only a band-aid and not a long-term solution, this injection of liquidity and the bilateral currency swaps will help Sri Lanka meet its foreign exchange requirements until the end of the year. But the national challenges facing the country are only growing. How the small state navigates all three levels will be critical to its survival in the coming decade.

Editor’s Note: A version of this piece originally appeared on 9DashLine and has been republished with permission from the editors.

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Image 1: Nazly Ahmed via Flikr

Image 2: Nazly Ahmed via Flikr

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