Dragon’s Debt Trap: Sri Lanka’s Financial Crisis

“There are two ways to conquer and enslave a country: One is by the sword; the other is by debt" - John Adams

Sri Lanka is facing the worst financial crisis since its independence in 1948. The country is facing a shortage of fuel, food and medicines. As per latest estimates – “Sri Lanka has to repay about $4 billion worth of debt this year, including a $1 billion international sovereign bond maturing in July. The country, through repeated cycles of borrowing since 2007, has piled up $11.8 billion worth of debt through sovereign bonds. The Asian Development Bank (ADB) is in second place with a 14.3 per cent share. China is Sri Lanka's fourth-biggest lender and repayments to China are estimated at about $400-$500 million. The rest of the debt is owned by countries such as India and international agencies including the World Bank and United Nations.”

With Sri Lanka running out of essential resources, the citizens took to the streets demanding the current government to step down. President Gotabaya Rajapaksa announced a countrywide emergency amid escalating protests. There have been reports which suggest that many are fleeing the crisis-hit country and are likely to take refuge in India. Also, the Sri Lankan financial crisis comes at a time amidst the ongoing Ukraine-Russia conflict, that has already shaken the global economy.

Critics believe that Sri Lanka is the poster boy for China’s infamous debt trap diplomacy. “With its international loans surpassing more than 5% of the global GDP, China has now eclipsed traditional lenders, including the World Bank, the International Monetary Fund (IMF) and all the creditor nations of the Organization for Economic Cooperation and Development (OECD) put together. By extending huge loans with strings attached to financially vulnerable states, it has not only boosted its leverage over them but also ensnared some in sovereignty-eroding debt traps.” However, China’s debt trap should not be seen in economic terms alone, and therefore, it is now being dubbed as a “strategic trap” or as some like to call it, the “modern-day colonialism.” “Poor nations like the Republic of Djibouti, Laos, Zambia, and Kyrgyzstan have debts to China amounting to 20% of their GDP. And that according to AidData, another 40 small and medium-sized nations have at least a 10% exposure, including hidden debt.”

For India, the crisis in Sri Lanka is even more worrying, as not only India is wary of China’s presence in its backyard but also, being maritime neighbours, Sri Lanka’s crisis is bound to have spillover effects on India. With many fleeing the nation, a huge influx of refugees can be expected in the southern states of India. “More than a dozen refugees have reached India by boat and Indian media reported, citing intelligence sources, that an estimated 2,000 more would follow in the coming days.” It could also reactivate the Liberation Tigers of Tamil Eelam (LTTE) causing further security concerns for India. 

While China refused to help Sri Lanka as it would set a wrong precedent for other countries that have taken loan from China, India came to Sri Lanka’s rescue. India follows a neighbourhood first policy and has been magnanimous towards Sri Lanka by extending financial support to the crisis-hit country since January. India recently announced two credit lines for food and fuel, worth $1.5 billion and $912 million loan for Sri Lanka. Meanwhile, Lanka IOC, the subsidiary of Indian Oil Corporation in Sri Lanka, will release 6,000 metric tonnes of diesel to Sri Lanka as it pitches in to mitigate the spike in power cuts in the island nation. Also the Indian traders have started loading 40,000 tonnes of rice for shipment to Sri Lanka.

Although, Sri Lanka’s financial crisis is owing to several reasons, and it will take an overhaul of Sri Lankan economy and debt restructuring for the country to come back to normalcy in the coming years, however, it is also a result of China’s debt-trap diplomacy, “loading poor countries up with debt, refusing to renegotiate terms, and then taking control of the infrastructure itself”, that has resulted into worst financial crisis the country has seen. “In South Asia, with the Indian Ocean and Indo-Pacific as new theatres of contestation, Beijing will, and has capitalised on opportunities to further entrench its presence, influence, and leverage in the region” using its economic heft by providing state-sponsored loans to advance its economic and geopolitical interests. “Even a cursory look at Sri Lanka’s economic woes will be an eye-opener for any nation in South Asia that thinks China’s Belt and Road Initiative, heavy loans and economic profligacy can catapult it to prosperity.”

India must now cease the opportunity and protect its strategic backyard from China’s misadventures. Enjoying a strategic vantage point, “Sri Lanka is halfway between the two main choke points, Suez Canal and Strait of Malacca, and is the main route for tonnes of cargo traversing through the narrow sea lanes in the Indian Ocean.” It is only imperative for India to love thy neighbour and help assist Sri Lanka during its worst times while also securing its own strategic and economic interests.

The writer of this article, Saloni Salil, who is a Geopolitical Analyst.