Sri Lanka’s crisis and the dilemmas of small states
Sri Lanka’s problems have less to do with debt traps than with the inability of small states lodged between major powers to pursue a self-reliant foreign policy
“The young ‘Gota Go Home!’ protesters who demand President Gotabaya Rajapaksa’s resignation seem to be unaware of the global dynamics of the Sri Lankan crisis. Perhaps local and foreign interests guiding the protests may want to keep it that way. They are certainly not encouraging the protesters to join global calls for much-needed debt cancellation, debt swaps and regulation of capital market borrowing to prevent debt crises occurring in the first place.”
Asoka Bandarage, “Sri Lanka: Debt crisis, neocolonialism and geopolitical rivalry”
Sri Lanka’s economic woes have not cast a shadow over its complex foreign relations. On August 16, the southern port of Hambantota welcomed the Yuan Wang 5, a research vessel from China. While Colombo had asked for a deferral of the visit, it eventually relented and allowed the ship to dock until August 22. India, which denied pressurising the country over the issue, nevertheless registered its unease about the visit.
Beijing contends that the vessel was used for research purposes. The Indian media, on the other hand, has described it as a “dual-use spy ship.” The sequel to the drama unfolded a few days after it left the Port, when China’s Ambassador to Colombo, Qi Zhenzong, wrote a rather frank op-ed about the matter. The article accused India and the West of continuing to colonise Sri Lanka. Arguing that Sri Lanka had the right to permit the docking of the vessel, it noted that the Yuan Wang 5 had complied with “international practice.”
The article sparked outrage. The Indian High Commission registered its displeasure, accusing the Ambassador of “violating basic diplomatic etiquette.” Western embassies, by contrast, remained silent. Political analysts have observed that the episode may dampen Sri Lanka’s relations with India. Since January, New Delhi has dispensed assistance to the tune of USD 3.8 billion. Colombo’s decision to permit the docking of the Chinese vessel might leave India wondering whether the island is pitting the two countries against each other.
Sri Lanka cannot afford to engage in such balancing, yet it cannot avoid it either. Reeling from its worst financial crisis since independence, the USD 84 billion economy is down to its last few million dollars. Although rationing and restrictions on imports have eased the pain somewhat, such policies are not sustainable. The latest spate of import restrictions, which even the Governor of the country’s Central Bank has questioned, bans intermediate capital goods that local industries desperately need. The only tenable solution is a bailout from the IMF, which experts say may take as much as six months.
India has emerged as Sri Lanka’s saviour. To put it in perspective, without Indian aid, the economy would have collapsed to the ground. Though commentators compare the situation to the crisis in Lebanon, such comparisons miss the geopolitical angle. Colombo is flanked by two powerful neighbours, one a regional hegemon, the other a rising superpower. Despite the country’s best efforts, these two continue to confront other in the neighbourhood. Such confrontations have played out more to its disadvantage than advantage.
Sri Lanka’s position is also not comparable to Taiwan’s or Ukraine’s. While these are states flanked on one side by a regional powerhouse, rival powers vying for dominance over the region through them, like the United States, the European Union, and NATO, are not located within that powerhouse’s immediate sphere of influence. The situation is different in Sri Lanka, and more complex: so complex, in fact, that the island has no choice but to watch as it gets entangled in one showdown after another between Delhi and Beijing.
Much has been written about Sri Lanka’s dependence on Beijing, India’s assistance to its ailing neighbour, and Colombo’s reticence in siding with what commentators portray as its saviour. Beijing’s reluctance to renegotiate Sri Lanka’s debts has reinforced these narratives. According to this reading, Sri Lanka needs to be more upfront about its foreign policy, which means abandoning its decades-long dalliance with Beijing. This line has been touted with relentless vigour over the last few weeks and months by certain thinktanks, institutions, and other establishments, both regional (Indian) and Western (US).
The reality is that its location and economic situation make this an untenable strategy for the island. Sri Lanka can ill-afford antagonising any of its powerful allies, something it found to its cost in early June when the Commercial High Court in Colombo detained a flight over a transaction between a Russian airline and a Irish leasing company.
While the Russian Foreign Ministry immediately condemned the incident, the Sri Lankan Foreign Ministry replied that the government had nothing to do with the detention order. It was a classic Catch-22 situation: the government could not interfere with the order, since it would be seen as an infringement on the judiciary, yet it could not detach itself either, since Russian tourists made up the bulk of arrivals in the country. This point is important, since all if not most analyses of the controversy ignore the fact that Sri Lanka’s link with the IMF has made it susceptible to Western discourses of human rights and transparency, which explains its seeming reluctance to forge closer economic ties with Russia.
The reason for small states like Sri Lanka becoming embroiled in these quagmires isn’t just that they recklessly borrowed money, but that they haven’t been properly encouraged, or directed, to shift to long term development strategies, which can enable them to pursue a self-reliant foreign policy.
This does not excuse the vanity projects and white elephants that governments in these states have lavished in the name of development. And yet, as Umesh Moramudali has noted more than once, while China was the only lender willing to cough up bucks for Sri Lanka’s post-war development, the Rajapaksa administration also pursued capital markets, issuing its first ISB in 2007, the same year Beijing stepped in with a USD 307 million loan for Phase I of the Hambantota Port. Instead of prioritising sustainable industrial growth, successive regimes went on issuing bonds and racking up external debts.
In focusing attention on China, or for that matter India, foreign policy experts have thus missed the bigger picture. The role of international sovereign bonds in economic fallouts has been side-lined. China’s reluctance to forgive Sri Lanka’s debts may stall IMF negotiations, but a more serious setback has been Hamilton Reserve’s decision to sue the country in a US court and Sri Lanka’s stock of market borrowings, which make up 47 percent of the total. Moreover, “following the global financial crisis,” observe C. P. Chandrasekhar and Jayati Ghosh, “easy access to foreign liquidity encouraged governments to prime the economy with support from foreign capital, resulting in the stock of external debt rising to exceed $56 billion in 2020.” Yet these aspects to the crisis have received little attention.
In a subtle critique of the aragalaya, Asoka Bandarage observes that the protesters did not transform their calls for regime into a cohesive discussion, and debate, about debt justice and IMF austerity. This is true. But what we have been seeing since April is the gradual but painful impoverishment of the middle-classes: the social group that had been most vocal in and throughout the three-month struggle against Gotabaya Rajapaksa’s regime. Given their changing fortunes, it may yet be possible to turn what was essentially a call for system and regime change into a comprehensive discussion on economic and foreign policy. If properly seen through, this could transform into a debate about the external dimensions of the crisis: one which commentators have either glossed over or ignored.
Sri Lanka is the best, and possibly the only, example of a small state flanked by a regional hegemon that in turn courts its most powerful rival as its immediate neighbour. This is a unique position, and the country hasn’t exactly benefitted from it. Indeed, in a big way, its crisis is tied to such complexities. A more cohesive analysis of the situation on the ground requires that we consider these complexities heads down. Instead of blaming one side or the other, it is more appropriate to view the problems of small states from the standpoint of those states themselves. A 360-degree perspective is needed. And yet, as far as states like Sri Lanka go, such a perspective remains conspicuously missing.
Uditha Devapriya is researcher and columnist from Sri Lanka. He is the Chief International Relations Analyst at Factum, an Asia-focused thinktank on International Relations, Tech Cooperation, and Strategic Communications based in Sri Lanka.
