China & Sri Lanka: From FTA to Politics, Beijing’s Death Grip Is Tightening

If the world doesn’t intervene, Sri Lanka may soon find itself working, dressing and eating at Beijing’s command.

People in Sri Lanka lining up for fuel. 

(Photo: Deeksha Malhotra/The Quint)

Ranil Wickremesinghe has been elected as Sri Lankan President. The election came after weeks of public protests against former President Gotabaya Rajapaksa, who fled the country and resigned last week. However, Wickremesinghe is considered illegitimate and a Rajapaksa ‘stooge’ by demonstrators, which was evident in the new wave of protests after he was declared Acting President on Friday last week: a few hundred people had attacked the headquarters of the state TV and the premier's residence. Fresh protests have already gripped Sri Lanka with Wickremesinghe’s election as President, with a youth activist stating, "He is basically more of a Rajapaksa than the family members themselves."

Sri Lanka's Crisis Had Been in the Making for Years

Rajapaksa and his family, who for years have occupied key positions in Sri Lanka's politics, are guilty, according to the population, of having led the country into bankruptcy – in a literal and not just in a figurative sense. Food is missing, and not for a few days. There is no fuel, there is a shortage of medicines, and things that are available have become so expensive that they cannot be accessed by most of the population. Prices of basic food items have tripled, and there is no gas for cooking.

The problem, in a nutshell, is that Sri Lanka is almost completely dependent on foreign imports for food and fuel needs, and that at the moment, it hardly has any foreign currency reserves to pay for the aforementioned imports.

Rajapaksa and his team, to explain the disaster, have blamed the COVID-19 pandemic that had blocked travel for two years, virtually crushing one of the main sources of Colombo's trade balance: tourism. True, but not completely.

Sri Lanka’s crisis had been, for some years now, an impending disaster. It all began, more or less, with the ambitious Hambantota port project, which is part of the even more ambitious 'Belt and Road Initiative' of China. Hambantota has now become a textbook case among experts to explain the 'debt trap' in which China pushes governments unwary enough to sign up for the BRI. To finance the construction of Hambantota, the Sri Lankan government borrowed money, on more than expensive terms, from Chinese banks.

How China Sunk Its Teeth Deep Into Sri Lanka

Finding itself in dire straits almost immediately, given the almost nil immediate revenues from the investment, Sri Lanka found itself unable to repay the debt. At that point, Beijing requested the port as collateral for the loan, forcing the government to entrust the management (and revenues) for 99 years to the China Harbor Engineering Company (CHEC). And that was just the beginning. In fact, CHEC ‘won’ in June 2021 a new development project for a 17-km elevated highway in Colombo.

The terms of the agreement give CHEC the ownership of the highway and allow it to recover the capital and earn profits by eventually returning the highway to the Sri Lankan government after 18 years. But there's more: CHEC is in fact a subsidiary of the state-owned China Communications Construction Company (CCCC). Using the same technique, the CCCC has built the Mattala International Airport and is building the port city of Colombo. This is the same CCCC that was blacklisted by the Donald Trump administration in the US in 2020 for illegally building militarily strategic islands in the South China Sea. The CCCC was also blacklisted in Bangladesh in 2018 for attempting to bribe a senior government official when the company was negotiating with Dhaka on the expansion of a major highway in the capital.

The CHEC and the CCCC were also protagonists in Sri Lanka in various corruption scandals and are alleged to have heavily interfered in the political life of the country.

Chinese Ambassador Qi Zhenzhong visited last year the Tamil North of the country to woo the Tamil minority with a trip to Jaffna and Mannar. National Alliance leader MA Sumanthiran, an MP, has come out strongly against Chinese entry into the North, reflecting the general anti-Chinese sentiments of Tamils. They have not forgotten China’s help to Sri Lanka in crushing the Eelam struggle in 2009.

'Assurances' from Beijing

Ambassador Qi has also made a strong pitch for resuming the negotiations for a Free Trade Agreement (FTA) with Sri Lanka, which was stalled after six rounds of talks. “We are open to discussing any concerns and China will be flexible so we can ensure early harvest for Sri Lanka,” he said. The FTA will also help Sri Lanka become a sub-distribution hub for Chinese firms to set up manufacturing operations and serve global markets. He cited the example of Cambodia, a low-income country, which had greatly benefited from its FTA with China.

Last but not the least, China is said to have financed, in 2015, the electoral campaign of former president Mahinda Rajapaksa, brother of Gotabaya Rajapaksa, the current president. Last January, Gotabaya, in a desperate attempt to avert the crisis, asked Chinese Foreign Minister Wang Yi to restructure the debt repayment plan to cope with the rapid deterioration of the financial situation. He had asked for facilitated conditions for the payment of Chinese exports to Sri Lanka, which amounted to about $3.5 billion, and for Beijing to allow, subject to strict COVID-19 protocols, the return of Chinese tourists to the country. Obviously, Wang Yi, after declaring at a press conference that the ‘debt trap’ is all Western propaganda and promising a ship loaded with rice, has returned home.

Becoming a Hostage to China 

To make matters worse, Gotabaya’s reckless and populist policies were also destabilising the country. In 2019, in order to be elected, he had promised (and carried out) substantial tax cuts, which cause an estimated loss, according to the same government, of about $1.4 billion. Not only that, in the pitiful attempt to stem the need for foreign currency to pay for imports (and to pay back the Chinese), Rajapaksa and his government took further measures to feed them when not harmful. They began with banning the import of all unnecessary goods (including shoes) by implementing monetary policies not worthy of the name and, above all, by blocking imports of chemical fertilizers.

In particular, they decided to suspend the import of Chinese fertilizers and asked India for help. India not only provided fertilizers but also temporarily averted the financial crisis with various credit openings by providing financial aid of approximately $1.9 million to Colombo. But that wasn't enough.

The $6.5 billion that Sri Lanka owes to Beijing weigh like a stone. The Chinese proposal to increase Colombo’s foreign currency reserves by exchanging the Sri Lankan rupee for Chinese currency (the same proposal was made some time ago to Pakistan) was not received well.

The Colombo government has asked for further help from India, the World Bank and the International Monetary Fund (IMF). The Chinese are said to have not taken it well.

Wickremesinghe said a few days ago that his priority, at the moment, was “to ensure three meals a day” to the population. But if the rest of the world does not intervene, the country may soon find itself working, dressing and eating in the manner of Beijing.

(Francesca Marino is a journalist and a South Asia expert who has written ‘Apocalypse Pakistan’ with B Natale. Her latest book is ‘Balochistan — Bruised, Battered and Bloodied’. She tweets @francescam63. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for his reported views.)