Sri Lanka's Current Economic Crisis May Push the Country Towards Civil Unrest

By IndraStra Global News Team

Cover Image Attribute: Chinese Foreign Minister Wang Yi, left, poses for media before he meets with Sri Lankan Prime Minister Mahinda Rajapaksa in Colombo, Sri Lanka. / Dated: January 9, 2022 / Source: AP

By IndraStra Global News Team

Earlier this week, China’s foreign minister Wang Yi was in Sri Lanka on a two-day visit at a time when the island nation is facing acute economic distress. The crisis, triggered by dwindling foreign exchange reserves which dropped to $1.6 billion in November 2021. This has led to soaring prices, acute shortages, and long queues in front of provision stores. Foreign reserves draining so rapidly could only mean that sovereign default is imminent, economists and thinktanks warned. American credit rating agency Fitch downgraded the island nation to a ‘CC’ rating, which is the lowest rating prior to default. This tough economic situation has battered the image of the all-powerful ruling Rajapaksa family.

Wang’s recent visit was to mark 65 years of diplomatic relations between China and Sri Lanka. He arrived in Sri Lanka on Saturday night after visiting the nearby Maldives, in the final leg of his first foreign tour of 2022 which has also taken him to Eritrea, Kenya, and Comoros. 

The friendship between China and Sri Lanka was sealed soon after Independence when the two countries signed the rubber for rice pact in 1952 which is also known as the "Ceylon-China Trade Agreement of 1952". At that time, China was under United Nation (UN) sanctions for supporting North Korean aggression on South Korea. Member countries of the UN were asked not to trade with China. Sri Lanka broke ranks and signed the rice for rubber pact. That was the start of the friendship.

In the last decade, China has lent Sri Lanka over $5bn for projects including roads, an airport, and ports. But critics say the money was used for unnecessary schemes with low returns and some of which ended up as white elephants. According to Government data, China accounted for about 10% of Sri Lanka’s $35bn foreign debt to April 2021. Officials said China’s total lending could be much higher when taking into account loans to state-owned enterprises and the central bank. Unable to repay a $1.4bn loan for port construction in southern Sri Lanka, Colombo was forced to lease the facility to a Chinese company for 99 years in 2017.

An official statement was released by Sri Lanka's presidential office, "The president pointed out that it would be a great relief to the country if 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." The statement also said China was asked to provide "concessional" terms for its exports to Sri Lanka, which amounted to around $3.5bn last year, without providing further details. 

At this moment, there is no public statement issued by China on Sri Lanka's request. However, Xinhua quoted Wang as saying, in a thinly veiled reference to India., "It does not target any third party and should not be interfered with by any third party.” This is an apparent reference to India’s concerns over Beijing’s big-ticket strategic projects in the island nation in the Indian Ocean.

Last month, China suspended a project to install hybrid energy plants in three islands of Sri Lanka’s north, citing “security concern” from a “third party”, amid reports of Indian concern over its location which is not far from Tamil Nadu’s coast.

During the trip, Wang also met Sri Lankan Foreign Minister G. L Peiris. A press release by the Chinese Foreign Ministry quoted Wang as saying. “During my visit to several Indian Ocean island countries this time, I feel that all island countries share similar experiences and common needs, with similar natural endowment and development goals, and have favorable conditions and full potential for strengthening mutually beneficial cooperation.” The press release further added, "China proposes that a forum on the development of Indian Ocean island countries should be held at an appropriate time to build consensus and synergy and promote common development. Sri Lanka can play an important role in this regard.”  

To counter China, India has recently raised its economic profile, extending lines of credit and modest grant aid, rather than massive loans. But, the major Indian banks are cautious about extending lines of credit given the serious dollar shortage of the Sri Lankan central bank, which means that investment is not available when it is needed the most.

Image Attribute: A woman carrying food bags walks past people queuing outside a state-run supermarket to buy essential food items in Colombo, Sri Lanka, on September 3, 2021. / Source: ISHARA S. KODIKARA/AFP VIA GETTY IMAGES

Earlier in August 2021, President Gotabaya Rajapaksa, using powers vested in the country’s Public Security Ordinance, declared Emergency regulations about the distribution of essential food items. The regulations sought to empower authorities to provide essential food items at a “concessionary rate” to the public by purchasing stocks of essential food items, including paddy, rice, and sugar, at government-guaranteed prices, and prevent market irregularities and hoarding. 

Do note, there is historical evidence to suggest, that higher food prices trigger violent riots (as distinct from civil conflict). However, food insecurity alone is not a condition provocation for conflict. Like all cause and effect relationships, the link between the two forces is context-specific and varies according to a country’s level of development and the strength of its political institutions and social safety nets. And, currently, Sri Lanka is at odds with the ground realities. The current crisis is man-made; putting the majority of the eggs in one basket (of China) and still going after for more. If the Rajapaksa administration continues in this path, then the final nail in the coffin of Sri Lanka's sovereignty is imminent.

With reporting by Al Jazeera, BBC, The Guardian, The Island, The Print, and Reuters

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