On Sunday, Chinese Foreign Minister Wang Yi visited Sri Lanka to promote China’s grandiose Belt and Road Initiative, as the island nation sought assistance from Beijing to help it recover from a foreign currency and debt crisis.
Wang landed in Sri Lanka on Saturday after visiting the Maldives as part of a multi-city journey that also included stops in Eritrea, Kenya, and the Comoros.
Wang was set to see President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa in Sri Lanka. Wang and Prime Minister Rajapaksa were scheduled to speak later at Colombo’s Port City, a reclaimed island created with Chinese capital. Sri Lanka is in the midst of one of its worst-ever economic crises, with foreign reserves at roughly $1.6 billion, hardly enough for a few weeks’ worth of imports.
According to Central Bank estimates, current Chinese loans to Sri Lanka number roughly $3.38 billion, excluding loans to state-owned enterprises, which are separately accounted for.
“Technically, we may now claim bankruptcy,” Muttukrishna Sarvananthan, principal researcher of the Point Pedro Institute of Development, said.
When your foreign reserves are in the red, you’re technically bankrupt.”
Households are experiencing significant shortages as a result of the circumstance. Long lines form to purchase necessities such as milk powder, cooking gas, and kerosene. Prices have risen dramatically, with the inflation rate rising to 12.1% by the end of December from 9.9% in November, according to the Central Bank. During the same time frame, food inflation soared to almost 22%.
Importers are unable to clear crucial cargo, and manufacturers are unable to purchase raw materials from overseas due to a currency shortage. Expatriate remittances have also decreased after the government mandated mandatory foreign currency conversion and exchange rate regulations.
Due to downgrades by rating agencies, Sri Lanka has lost a significant amount of its borrowing power. Fitch Ratings indicated an increased risk of loan failure in December. The Central Bank has added a $1.5 billion currency swap in Chinese currency to the reserves, although analysts argue about whether it can be counted as foreign reserves.
Wang’s visit is particularly significant in terms of regional relations, as China and India, Sri Lanka’s closest neighbour, compete for influence on the island.
“For a prospective rescue package, we can see Sri Lanka being sandwiched between India and China,” political expert Ranga Kalansooriya said.
He noted that India has been dragging its feet for some time, while China is attempting to use the situation to its full potential.
Since the end of the civil war in Sri Lanka in 2009, India has been suspicious of China’s rising investments and loans in the country. Sri Lanka is considered part of India’s sphere of influence. Sri Lanka is a key component of China’s Belt and Road global infrastructure programme. Wang, according to Kalansooriya, may also be aiming to improve relations with Sri Lanka, which have recently been strained over a shipment of fertiliser purportedly containing hazardous germs and business agreements signed with China’s rivals, the United States and India.
According to Kalansooriya, China is unlikely to help Sri Lanka recover from its economic crisis.
“They’ll hunt for new commercial chances,” he said, “fishing in the murky waters of the country’s economic doldrums.”
