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Sri Lanka. What next?

At the height of the numerous protests that have swept through Sri Lanka over the past 4 months, a crowd of protesters stormed the presidential palace in the capital Colombo, forcing President
Gotabaya Rajapaksa to flee.
Former Prime Minister Ranil Wickremesinghe is elected as the ninth President via a parliamentarian election. Uncertain future.

On Saturday 9 July, on board a military plane, President Rajapaksa headed first to the Maldives and then to Singapore where he resigned in front of the Sri Lanka ambassador on 15 July. On July 20, former Prime Minister Ranil Wickremesinghe was elected as the ninth President via a parliamentarian election.

He won the election with backing of the ruling Sri Lanka Podujana Peramuna party (SLPP) which had the most seats in parliament. Wickremesinghe is due to serve for the rest of Rajapaksa’s term, until November 2024. However, there are concerns his election signals an unstable future for Sri Lankan politics, with protesters vowing to unseat him just as they did Rajapaksa.

The institutional crisis in Sri Lanka was triggered by the collapse of the economic system. Totally dependent on foreign countries, in the early months of 2022, the island found itself without the currency reserves necessary to pay for imports of essential goods such as food,
oil and medicines.

The collapse of reserves is mainly linked to the decrease in remittances from abroad, which have reached their lowest levels since 2012, and to the crisis in the tourism sector caused by the pandemic and the deterioration of security conditions following the Easter 2019 attacks claimed by the National Thowheeth Jama’ath – a local Islamist group affiliated with ISIS – which caused about 270 victims and
over 500 injured.

The controversial policies promoted by the Rajapaksa brothers, characterized by poor strategic vision, contributed to aggravating the structural problems of the Sri Lankan economy. In particular, the reduction in taxes and the cut of about 7 percentage points in VAT, which went from 15 to 8%, approved by the government in November 2019 to boost domestic consumption, contributed to the deterioration of the macroeconomic situation.

In fact, thanks to the pandemic and lockdowns, the tax cut has produced a drastic reduction in overall revenue that has weakened the country and paved the way for rating agencies to downgrade. Even the recent decision by the Central Bank of Sri Lanka to devalue the rupee, aimed at the government’s intentions to attract remittances and investments, ended up favouring a surge in inflation which reached 54.6% on an annual basis in June. Even an innovative measure such as the ban on the use of chemical fertilizers has proved short-sighted to the test of facts, causing a drop in crop yields of up to 60% in the central-northern districts of the country.

At international level, the end of the Rajapaksa era could translate into a gradual downsizing of the Chinese presence in Sri Lanka. The strong ties between Colombo and Beijing date back to the years of post-civil war reconstruction and have evolved due to the diplomatic action and political choices of the Rajapaksa. Subsequently, the inclusion of Sri Lanka in the 21st Century Maritime Silk Road, the maritime chapter of the New Silk Road, favoured Chinese penetration into the economic system of the island.

Over time, Beijing’s attention has turned to strategic infrastructures with investments useful to realize the Colombo Port City Project, funded by China Harbour Engineering, or the construction of the Magampura Mahinda Rajapaksa port, commonly known as Hambatota, built thanks to the funds of the EXIM Bank of China and then sold under management to Beijing due to Colombo’s inability to honour the loans.

Overall, Chinese investments in infrastructure on the island amounted to about 12.1 billion dollars between 2006 and 2019, years in which, except for the parenthesis linked to the electoral defeat of 2015, the Rajapaksa dominated the political life of the island.

China’s economic commitment in Sri Lanka has sparked a wide debate on the real impact of investments and the island’s ability to cope with its debts, at the risk of ending up in the so-called “debt trap”. While, on the one hand, the ongoing crisis poses challenges to relations between China and Sri Lanka, on the other it seems to present an opportunity for Narendra Modi’s India. In fact, in a revival of what happened at the end of the civil war in 2009, Sri Lanka needs the help of the main regional players, namely India and China, and international financial institutions.

In this context, in the face of the lukewarm reaction from Beijing, Delhi has shown itself to be particularly reactive in wanting to support the island. In a short time, India has pledged about $ 4 billion in loans, credit lines and currency swaps, in order to guarantee Sri Lanka the purchase of basic necessities. Overall, Delhi has shown that it wants to take advantage of the space left momentarily by Beijing to turn the crisis into an opportunity. The goal is to regain lost ground in a country that fully falls within the priorities of the Indian neighbourhood strategy called “Neighbourhood First”.

Despite invaluable Indian support, Sri Lanka’s future remains tied to the support of international financial institutions such as the World Bank (WB) and the International Monetary Fund (IMF).
While the former is providing the island with the necessary liquidity to buy gas and fertilizers, the IMF can offer Colombo a structural solution to overcome the crisis.

For this reason, negotiations have been underway for months between the Washington-based institution and the island which should end with the activation of the Extended Fund Facility, the IMF tool useful for resolving medium-long term imbalances in the balance of payments. However, negotiations are also progressing slowly due to the inability of the Sri Lankan political class to implement the agreed reforms.

Although IMF support for the island is not new, the negotiations over recent weeks could take on a broader political significance. In fact, Sri Lanka recently, on the basis of what has been done by other regional players such as India, contacted Russia in an attempt to obtain oil at a discounted price.

This move, in addition to fully inserting the island in the wider diplomatic competition underway between the West and Moscow, could incentivize the IMF to accelerate the closing of the deal. For its part, however, Sri Lanka must find a quick solution to the institutional crisis so as to be a credible interlocutor in the eyes of the Fund.

The current crisis, therefore, could impact on Sri Lanka’s international and regional positioning. At the moment, China does not seem interested in playing a central role in the affairs of the country and this leaves open a space that India could try to exploit. In this context, the flight of President Rajapaksa to the Maldives, a country historically close to Delhi, also signals the central role played by the subcontinent in this phase. In addition to the competition between India and China, there is the increasingly important role of international financial institutions which represent the only lifeline for a sinking country.

However, in the short term, Sri Lanka does not seem capable of resolving the severe economic crisis. The momentary lack of an internationally recognized political leadership, in fact, deprives the IMF of interlocutors and prevents the reaching of an agreement that appears for the moment only postponed. In the absence of a sudden change of policy by Beijing in the coming months, it is possible to foresee an expansion of Indian influence in Sri Lanka that would partially rewrite the balance in the Indo-Pacific. Any repositioning of the island, however, would be fragile as it is essentially linked to necessity rather than a clear strategic choice.

Moreover, in the long run, China is unlikely to abandon its assets in the country entirely after years of political and economic investment. In light of what has been described, it is possible to imagine that Sri Lanka will turn into one of the main theatres of the clash between Delhi and Beijing in which the effectiveness and prospects of their respective regional strategies will be measured. (Photo:123rf.com)

Tiziano Marino/CeSI

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