By Eric Vandenbroeck and co-workers

Already in 2018, we pointed out that Sri Lanka's desperately under-utilized Hambantota Port had to be surrendered to Chinese operators in a humiliating example of debt-trap diplomacy.

More recently, China has dispatched a military ship to Sri Lanka's port city of Hambantota amid the rapidly changing political situation in the island nation. The move has raised questions about whether China is trying to establish a robust military presence on Sri Lanka's Indian Ocean coast. Yet Sri Lanka asked China to defer the planned visit of the ship, as it was objected to by India. That is worrying that the Chinese-built and leased China will use the port of Hambantota as a military base in India's backyard. Not to mention that India recently emerged as the top lender to Sri Lanka, extending USD 376.9 million worth of credit compared to USD 67.9 million by China in the first four months of this year.

China won Sri Lanka’s earlier trust because of its willingness to lend money to countries shunned by the international community for their poor human rights records. Indeed, their relationship strengthened after allegations emerged in Sri Lanka of state-sponsored human rights abuses during the Tamil Tigers-led insurgency in the country.

 

China’s Motivations

What’s in it for Beijing? China has been investing massively in infrastructure and other projects in nearby countries, primarily because this helps guarantee its access to foreign markets through key regional maritime routes. These investments are a substantial source of Chinese influence in the region.

In addition, Sri Lanka is significant in China’s “string of pearls” strategy in the Indian Ocean. The port of Hambantota, operated as a joint venture and currently leased to China for 99 years, straddles a bustling east-west shipping route. It offers a diversified range of transport and logistical services. China has a strategic imperative to gain immediate access to India.

Ocean and control ports in the Asia-Pacific region so that it can conduct trade and maintain strong relations with its numerous partners. Hambantota is close to major sea lanes, so building a port there could help Beijing guarantee access to international trade routes nearby.

However, China hasn’t been enthusiastic about coming to its ally’s aid. It even refused to restructure Sri Lanka’s debt when asked. On the other hand, India was the first to provide immediate help with a $1.5 billion line of credit. A line of credit may not be ideal given Sri Lanka’s situation, but right now, it needs whatever help it can get. New Delhi’s offer is an attempt to pry the island nation away from Beijing– not surprising since India is trying to counter China in the Indo-Pacific region, where the two regional powers have competing interests. For India, wooing one of China’s “pearls” would be a big step.

China’s hesitancy in helping Sri Lanka is a result of domestic constraints. The East Asian country is facing its structural economic problems and has been battling an outbreak of the omicron COVID-19 variant for months, which has led to partial or complete lockdowns of significant cities, including its financial hub, Shanghai. Given that Beijing spent weeks considering whether to provide Sri Lanka with financial assistance, it seemed that China was unwilling or unable to help.

On April 25, however, talks between the two countries began after Chinese Premier Li Keqiang said China was ready to provide much-needed assistance for Sri Lanka. But many in Sri Lanka see this as an empty promise that came too late and only as a response to Sri Lanka’s talks with the IMF. Doubts about China’s credibility aren’t surprising, given that Sri Lanka in the past has had to find new financing for BRI projects after China failed to come through with promised funds on time.

 

Waiting in the Wings

China’s role in helping Sri Lanka resolve its economic crisis is important because it will set a precedent for other countries in South and Southeast Asia that may also face financial difficulties soon. Also, China’s global image is in part based on its ability to assist and invest in smaller neighboring countries, so if Beijing fails to come through, it could cast a negative light on its international standing.

Moreover, as seen with India, other powers are waiting in the wings to fill the void left by Beijing. China’s failure to act opens the door for other nations that want to counter Chinese influence in the region. And Sri Lanka has no choice but to rely on its largest creditors, many of which have an interest in strengthening China’s regional influence.

India, as mentioned, is one example, but Japan is another potential source of financial assistance. It has historically been a significant source of development aid for Sri Lanka and offered help during the country’s last economic crisis in 2016.

The U.S. has also provided financial assistance to countries in the region and may welcome an opportunity to undermine China here. Furthermore, Sri Lanka expects to receive $500 million as emergency aid from the Asian Development Bank and World Bank – two institutions affiliated with countries that have an interest in countering Chinese influence –in the next six months.

Much depends on China’s handling of Sri Lanka’s economic crisis. It’ll have to give up something significant, money, or influence.

 

Energy disruptions are threatening India’s economic recovery.

Although India has some of the world’s largest coal reserves, its massive power consumption means importing coal to meet its energy needs. India is facing a two-part coal conundrum:

Supply shortages and rising prices. Oil and natural gas prices were already rising as economies across the globe came back online from the pandemic. Between the recovery and the price hikes provoked by Russia’s invasion of Ukraine, many countries turned to cheaper energy alternatives, including coal. This, in turn, pushed up coal prices.

The situation concerns the Indian economy on several fronts; power demand was well above peak consumption last summer, and power plants are now in a weaker position to meet upcoming summer demand.

Coal shortages and slumping inventories have created electricity shortages in major Indian cities, including New Delhi, where hospitals have been affected. Sixty percent of households in India have already experienced daily power cuts. The government plans to increase domestic coal output and reduce coal supplies to the non-power sector. The supply cuts will affect aluminum smelters, steel mills, and other industrial activities, risking the country’s economic recovery.

 

 

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