Since the start of the new year, Sri Lanka has fallen deeper into an economic crisis. The crisis has led to protests across the country, the resignation of its Prime Minister, and its first debt default since independence. Ranil Wickremesinghe has recently been appointed as Sri Lanka’s prime minister for the sixth time, three days after Mahinda Rajapaksa’s resignation on May 9th. As the new administration looks to address the economic crisis it will need to attract support while being constrained by domestic instability—such as international concerns over attacks on peaceful protestors and fragility of the current political structure—that make the country riskier to lend to. Still, Sri Lanka’s strategic importance in the Indian Ocean Region will continue to make it an important player and competition point in geopolitical affairs, which is likely to influence both its domestic and foreign policy.
Domestic Politics, Economics & Foreign Policy
Despite its physical geography, Sri Lanka has never been an island when considering its global interactions. Sri Lanka has an established history of being intricately involved in international affairs due to its strategic location in the Indian Ocean adjacent to the sea lines of communication (SLOCs). Ancient Sri Lanka’s foreign relations were determined by its trade and commercial hub status, and its ability to garner support to withstand invasions from South Indian empires. Post-independence, domestic considerations such as economic development and security have strongly influenced Sri Lanka’s foreign policy choices. This includes—among other examples—the Rubber-Rice Agreement with China signed in 1952 to address national food shortages, and Sri Lanka’s signing of the Defense and External Affairs agreement with the British government to safeguard the island from Indian aggression enacted soon after independence.
As the new administration looks to address the economic crisis it will need to attract support…while being constrained by domestic instability that make the country riskier to lend to.
After mistrust in the 1980s and early 1990s, Sri Lanka shifted towards positive ties with India, and this later this extended towards China. These were due to the country’s emphasis on its South Asian and Asian identities and the need to amend and strengthen its international support system. In the past two decades, Sri Lanka has garnered significant economic, political, and military support from India and China. During the COVID-19 pandemic India assisted Sri Lanka with vaccines, oxygen supplies, currency swaps. Additionally, China also assisted Sri Lanka during the pandemic by donating vaccines, medical supplies, and loans.
However, in the current economic crisis there have been clear signs of frustration over China’s response —for instance the offer of further loans rather than reducing debt and the lack of transparency on assistance in the economic crisis. New Delhi, in contrast, has been more forthcoming in assisting Sri Lanka during its time of need by extending support that are tangible to the Sri Lankan people such as 40,000 Metric Tons of petrol, USD $5.6 million worth of food, milk powder and medicine in just the last week of May. In the first five months of 2022 alone, India has provided Sri Lanka with USD $3.5 billion in credit facilities to purchase essential items. This may reduce the trust deficit between the Sri Lanka and India, as India is presenting itself as a dependable partner. Moreover, any instability in Sri Lanka may place strain on India as Sri Lankans flee to southern India as refugees. Gaining Sri Lanka’s trust and being dependable is crucial for India as it seeks to reduce the Chinese influence in Sri Lanka. Beijing’s inflexibility on restructuring debt is likely to push Colombo towards New Delhi soon, quelling some Indian insecurities of Chinese influence in the island.
Economic Pressures and Foreign policy
Prime Minister Wickremesinghe has told all Sri Lankans to prepare for the worst in the months to come and anticipate extreme shortages of food and fuel. In the near term, Sri Lanka’s foreign policy will be influenced by the severe economic conditions it faces. Sri Lanka expects friendly states to assist it both bilaterally and at multilateral forums such as at the International Monetary Fund (IMF) or the Asian Infrastructure Investment Bank (AIIB)—although this will prove to be challenging as Sri Lanka defaulted on payments to international financial institutions. Sri Lanka’s default on debt has led to it being further downgraded by international credit rating agencies such as Fitch Ratings in May 2022.
While Sri Lanka’s economic crisis worsened in 2022, this situation had been brewing for some years—aggravated by fiscal mismanagement, the pandemic, and more recently the rising global costs sparked by the war in Ukraine. The country is also heavily reliant on imports, which dwindled foreign reserves further, contributing to the existing economic crisis due to the lack of foreign exchange markets to purchase essential goods. Sri Lanka suspended its foreign debt repayments in April, as it worked on a debt restructuring program to the IMF, which had referred to Sri Lanka’s foreign debt as “unsustainable.”
China makes up about 10 percent of Sri Lanka’s external debt, however, with loans at much higher interest rates when compared to other lenders like Japan. China, however, has been reluctant to restructure its loans to Sri Lanka. In response, Sri Lanka’s Central Bank Governor indicated that no external creditor will be given preferential treatment and that all will be treated equally in its debt restructuring. China, initially, was reportedly against Sri Lanka seeking assistance from the IMF and insisted on providing more loans to repay previous loans Sri Lanka had obtained. India’s response, meanwhile, has stood out as understanding of Sri Lanka’s domestic requirements through providing lines of credit to enable Sri Lanka to buy essential goods, food, fuel, and pharmaceuticals, besides approving USD $16 million worth of humanitarian assistance. India will strive to ensure stability in the region, as it is essential to projecting its own power, stability, and international standing. India may also play a supportive role in encouraging the international community to support Sri Lanka—such as the G7’s recent announcement that they would assist Sri Lanka in securing debt relief.
The messaging has shown the eagerness of Quad countries to reinforce their influence in Sri Lanka at a time when China is showing hesitation
However, political instability has added further challenges to Sri Lanka’s economic relations and negotiating grants with various institutions. The United Nations and a number of countries have called for independent inquiries and have expressed their concern about the deployment of military during protests calling for Mahinda and Gotabaya Rajapaksa’s resignation. This situation raises questions about whether countries that have previously pledged support would continue to do so, as Sri Lanka continues to operate in a precarious political situation with ongoing protests. India expressed support for democracy, stability, and economic recovery in Sri Lanka, China however has mostly been quiet on the matter only recently noting in a press conference of its readiness to play “a constructive role in Sri Lanka’s economic and social development,” while also highlighting current consultations on Sri Lanka’s debt. China’s comparative silence contrasts with the support particularly of Quad countries like Japan and India. Australia also provided USD $2.5 million to boost food security in Sri Lanka. A team from the United States treasury is slated to visit the island. Ultimately, the messaging has shown the eagerness of Quad countries to reinforce their influence in Sri Lanka at a time when China is showing hesitation.
Sri Lanka will require assistance from many countries and institutions to emerge from its current crisis—as economic security is only part of the problem that requires attention. Sri Lanka is likely to look towards avenues to improve the country’s economic footing with the support of Quad members and via other bilateral or multilateral collaborations. Towards this end, Wickremesinghe has called for a Foreign Aid Consortium to attract foreign commitments to Sri Lanka. So far, the ambassadors of China, India, Japan, United States and United Kingdom have met and made commitments to assist Sri Lanka.
Wickremesinghe has also begun to gain international confidence as individuals, countries, and multilateral groupings had come forward to provide debt relief. However, while it is important to receive assistance, Sri Lanka will need to implement appropriate domestic mechanisms to ensure the funds received are dispersed appropriately to retain international confidence. Regardless of receiving international commitments, Sri Lanka will continue to struggle in the near-term with the reality of pressing food and fuel shortages. Substantial structural changes will be required for Sri Lanka to regain a solid footing in the international and domestic systems.
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