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The Debt-trap Diplomacy has helped China boost its economy in recent times. It is basically a tactic used by Beijing to gain political or economic concessions from lower-income nations by over-extending infrastructure loans that then prove impossible to pay back on time. As the lower-income countries have become poorer after borrowing loans from Beijing, the Asian Giant has emerged as the world’s largest creditor. It has encouraged China to launch its Belt and Road Initiative (BRI), a global infrastructure development strategy adopted by Beijing in 2013 to invest in nearly 70 countries and international organisations. Now, Sri Lanka is the latest victim of China’s Debt-trap Diplomacy. Like many African countries, the tiny island nation has requested China to ease its debt burden.

Sri Lanka made the request during Chinese Foreign Minister Min Wang Yi’s recent two-day visit to Colombo. The Chinese Minister’s visit marked the 65th anniversary of Bilateral Diplomatic Ties and the 70th anniversary of the Lanka-China Rubber Rice Pact. During his meeting with Min on January 9, Sri Lankan President Gotabaya Rajapaksa urged China to restructure the debt owed by Colombo to Beijing. In a statement, the President’s Office stated: “The President pointed out that it would be a great relief to the country if the attention could be paid on restructuring the debt repayments as a solution to the economic crisis that has arisen in the face of the COVID-19 Pandemic.

Sri Lankan President Gotabaya Rajapaksa (3L) arrives with Chinese Foreign Minister Wang Yi (front R) at a sailing event in Colombo on January 9, 2022. (Photo Credit: AFP)

According to the statement, Sri Lanka received a loan of more than USD 5 billion from China or 10% of the country’s total foreign debt. Now, it has become difficult for Colombo to repay the debt due to an unprecedented economic meltdown. President Gotabaya Rajapaksa informed the visiting Chinese Minister that Sri Lanka’s foreign reserves declined rapidly because of the pandemic, which has a devastating impact on export and tourism sectors of the island nation over the last two years. In November 2021, Sri Lanka’s foreign reserves stood at USD 1.6 billion, triggering widespread concern about how Colombo might pay its high imports bill.

Meanwhile, President Gotabaya Rajapaksa also urged Min to help Sri Lanka attract Chinese tourists, as tourism is the main industry of the South Asian country. The President also hinted that Colombo might initiate a concessional trade credit scheme for imports from China, as it would enable industries to operate smoothly. As far as imports are concerned, China is Sri Lanka’s largest partner, with 22% of the island nation’s imports originating from Beijing. Prime Minister Mahinda Rajapaksa, too, discussed a host of issues, including tourism, investments, COVID-19 relief and post-Pandemic preparedness with the Chinese minister.

Prime Minister Mahinda Rajapaksa

In an apparent reference to India’s concerns over China’s big-ticket strategic projects in Sri Lanka (and also in the Indian Ocean), Min said that no third country should interfere in the close ties between Beijing and Colombo. “It does not target any third party and should not be interfered with by any third party,” Xinhua quoted the Chinese minister as saying, in a thinly veiled reference to India.

It may be noted that the Sri Lankan Prime Minister had made a similar request to India in February 2020 for a debt moratorium. However, India did not respond to it, reportedly. “If India agrees to postpone debt by three years, we can convince others too,” stressed the PM. The Narendra Modi Government in New Delhi also remains silent over more recent requests from Colombo for emergency Lines of Credit for import of food, fuel and medicines, and a currency swap to boost reserves. However, Indian Minister of External Affairs Dr Subrahmanyam Jaishankar recently assured Colombo of support “in difficult times”. A couple of weeks ago, the Indian minister twittered: “Greeted Foreign Minister G L Peiris of Sri Lanka in the New Year. A reliable friend, India will support Sri Lanka in these difficult times. Agreed to remain in close touch.

Although it is still not clear whether Sri Lanka would receive the assistance from China and India, Colombo would have to be prepared to meet its daunting foreign debt obligations in 2022, totalling over USD 7 billion, including bond repayments of USD 500 million in January and USD 1 billion in July. Currently, Sri Lanka is facing a deepening financial and humanitarian crisis that could lead the country to bankruptcy in 2022, as inflation rises to record levels. On August 30, 2021, Colombo announced a National Financial Emergency after a steep fall in the value of the Sri Lankan currency that caused a spike in food prices. Colombo Gazette has reported that Sri Lanka is continuously facing twin deficits, fiscal deficit and trade deficit, during a major part of the last decade. Since 2014, the foreign debt level of Sri Lanka has been on the rise, and reached 42.6% of GDP in 2019.

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