Geographical location of a country can be a double-edged sword. While it can bring a lot of benefits, it can also put a country between the devil and the deep blue sea. This is pretty much the case Sri Lanka has encountered.
For several years, the country’s economy was not doing great. On top of that the involvement of China, in number of significant development activities has raised domestic as well as geopolitical concerns. Things got worse when Sri Lankan government decided to lease the Hambantota port to China Merchants Port Holdings for 99 years. Due to the location of the port it is quite valuable to china as the ownership of the port allow them to use it to strengthen Belt and Road Initiative (also known as One Belt, One Road (OBOR))
OBOR is one of President Xi’s most ambitious foreign and economic policies. It aims to strengthen Beijing’s economic leadership through a vast program of infrastructure building throughout China’s neighboring regions. Many foreign policy analysts view this initiative largely through a geopolitical lens, seeing it as Beijing’s attempt to gain political leverage over its neighbors. There is no doubt that is part of Beijing’s strategic calculation.
Coming back to Sri Lanka, the decision to lease the port to China reflects the issues the country has faced in managing external economic situation. Poor performances of country’s external sector had forced Sri Lanka to focus extensively on commercial deals such as leasing Hambantota even at the expense of severe geopolitical implications. Data clearly indicate the weaknesses of the external sector and indicators such as BOP current account balance, export to GDP ratio, level of FDI, level of foreign reserves and external debt servicing clearly reflect that the country’s external sector is very vulnerable.
In any country, the strength or weakness of the external front of the economy is determined by exports, imports, FDI, external debt servicing, remittances, and reserves. In the case of Sri Lanka most of the indicators which reflects the states of above mention variables had performed very badly making the country very vulnerable to an economic downturn.
Sri Lanka’s exports as a percentage of GDP have been declining drastically during last decade. According to the Central Bank data, Sri Lanka’s exports as a percentage of the GDP has fallen to 12.7% in 2016 from 33% recorded in 2000. Besides, external debt repayments had soared up due to the colossal amount of commercial borrowings obtained during last decade while country has failed to attract enough FDI.
Due to the significant reduction of exports which has posed an imminent threat to the economy, Sri Lankan government took steps to start negotiation to enter FTAs. Accordingly, negotiations were started regarding expanding the existing FTA with India and entering into agreements with China, Singapore, and Thailand.
The reduction of exports may not have felt, if the country did not have to pay colossal amount of money as external debt servicing payments. As external debt servicing must be paid in dollars, it takes pushes the country to earn more dollars which is done through exports, remittances and FDI. When external debt servicing cost is high, while export revenue declining, it creates an imbalance of the external front of the economy.
It is on that backdrop, Sri Lanka turns to China despite the possible tension that could create with India. China’s OBOR initiative comes to the region with multiple offers. Whilst OBOR serves the national interest of China keeping up the demand for the goods it produces, it provides opportunities to other countries to develop their economies as well, particularly in the form of investment. OBOR is seen as a significant component of Chinese power expansion which is dominated by economic tools such as investment and debt. OBOR is the pinnacle of commercial diplomacy and is about everything. It provides debt, FDI, allow to expand exports, open avenues to connect to the Global Value Chains and allowing expand the industrialization.
Studies shows that exports of Global Production Network (GPN) products from China increased from US$47 billion in 1992– 93 to US$1.5 trillion in 2014–15, and these products accounted for more than 70 per cent of China’s total manufacturing exports. The study further notes that within GPN products, assembled products account for a larger share than components throughout the period and the pattern reflects China’s dominant role as an assembly center within global production networks. Moreover, the presence of China in GPN is likely to strengthen as OBOR develops and by using proper tools of commercial diplomacy Sri Lanka could reap benefits of china’s GPN connectivity.
In recent past, Chinese economic dominance of the globe has increased significantly. The studies further identified that two-way direct foreign investment is now an important feature of the Chinese economy. There has been extraordinarily rapid rise of China as a source of international investment over recent years. China is now the second largest international creditor and is soon to be the first. Until a few years ago, China’s investment abroad was very different from that of the established developed creditor countries. It mainly took the form of investing monetary reserves in the official securities of the United States and, to a lesser extent, other developed countries. China’s investment abroad is now moving rapidly towards a more normal pattern, with direct foreign investment rapidly becoming more prominent.
It was also noted that China has taken an active part in, contributed a constructive part and benefited from the international development system. The initiative to establish the AIIB is a constructive move. It has enabled China to undertake more international obligations, promote improvement of the current international economic system and provide more international public goods.
Some critics argue that china has used its economic powers to influence the foreign policy of countries using debt as an instrument. Certain critics categorizes this scenario as debt trap diplomacy where country’s national interests are compromised due to the massive debt owe to China and noted that Sri Lanka too got caught in debt trap diplomacy.
Yet Sri Lanka doesn’t have many choices. Early this month, Central Bank of Sri Lanka announced that it will issue Panda bonds to raise money from Chinese investors. Further, the country came to terms with China to syndicated loan of USD 1 billion as a temporary get away from the exchange rate crisis and to finance massive amount of debt servicing due in 2019 and 2020.
Close relationship with China might change the geopolitical dynamics of the region. It may upset India or even US. But Sri Lanka does not have much options left.