Lanka gets $2.9 billion IMF help, but China debt still a millstone

The good news for Sri Lanka is that it has reached an agreement with the IMF for a $2.9 billion loan, an Extended Fund Facility (EFF) in IMF parlance. But it is just the start of a series of consequential choices the island-nation faces. These choices will affect India greatly.

During a press conference in Colombo on Wednesday, the head of the IMF mission Peter Breuer, was asked a direct question. What would happen if Sri Lanka’s creditors do not restructure their debt to the island nation? This was a clear hint at China that is one the largest debtors. Breuer replied by saying “If one creditor or creditors are not willing to provide these assurances that would indeed deepen the crisis here in Sri Lanka and would undermine its repayment capacity.”

The country owes China $7 billion. While this might sound a small amount compared to its overall debt that is in excess of $80 billion, it is by far the most politically consequential part of the debt. It has allowed China to wield great influence over Sri Lanka. From getting hold of the Hambantota port to what is now routine interference in decisions that affect India. The most recent example being the docking of the spying ship Yuan Wang 5 at Hambantota in mid-August. The ship arrived after a delay as India protested against the ship berthing in Sri Lanka. But in the end, the Sri Lankan authorities relented. While nothing was said, it was clear that China was exerting behind-the-scenes pressure to allow its ship in Sri Lanka.

The danger of debt-fuelled Chinese interference in Sri Lanka has been known for a while. But in recent years this has accelerated. Incidents such as the Yuan Wang 5 ship are known openly but India is wary of what might go unnoticed below the radar. These dangers cannot be ignored any longer. India’s Northern and Eastern borders are in zones where conflicts with enemy countries are anticipated and have taken place in the past. But its peninsular region did not have that problem. That cannot be ruled out any longer.

The original motivation for Sri Lanka’s engagement with China was its fear of India especially in the wake of the latter’s support to Tamil separatists. But this was a mistake: India realised its mistake and supported Sri Lanka’s decimation of the LTTE. But Sri Lanka was in search of “options” and an escape from India’s embrace. But this was like an escape from an imaginary frying pan into a real fire. It was rather late when Sri Lanka realised that.

India’s neighbours have an “India paranoia” that is at odds with its benign handling of its neighbourhood. The surprising part of this is that these independent nation-states, certainly capable of calculating their national interests, could not do so when they began warming up to China.

It is in India’s interest to help Sri Lanka as much as it can. It has done that by providing nearly $4 billion to Colombo. More help should be given in whatever form that is possible. But this should be done after a straight talk with Sri Lanka about the dangers posed by China to its sovereignty. Those decisions are for Sri Lanka to make. It can either escape China’s clutches—however slowly–or it can drift its way even further in a direction where, at some point, sovereignty will be a mere illusion.

China aggressionEconomic crisisfinancial assistanceIndiaSri Lanka