Sri Lanka in the early 2000s eagerly adopted the Chinese model of growth based on infrastructural development. The Premise relied upon by Sri Lanka was that it would generate jobs and usher in prosperity. However, this utopian dream has led to nothing but a systemic, system-wide collapse of the very fabric of Sri Lankan society. The imminent threat of collapse has seen numerous states trying to gain or regain favour with the Sri Lankan authorities in a quest for geopolitical dominance in the area. India is trying to reassert its traditional influence in South Asia whilst being wary of Chinese attempts to control all strategic ports in Sri Lanka. On the other hand, China seems to be content with the fact that Sri Lanka has successfully fallen into the strategic, diplomatic trap laid by it.

A combination of several factors resulted in the current economic situation of Sri Lanka. These factors could potentially lead to a constitutional crisis in the region, with the potential of turning violent at the drop of a hat. This violence will in turn have a ripple effect on all the neighbours of Sri Lanka in South Asia. States are scrambling to figure out whether there is any way that Sri Lanka can be rescued from this economic crisis. 

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The international community has raised the alarm with regard to Sri Lanka’s inability to make its foreign debt repayments in 2022. This is because Sri Lanka is on the verge of a sovereign debt default that is triggered by the fact that the current usable foreign currency reserves of Sri Lanka have plunged below $1Billion. 

Sri Lanka is heavily dependent on imports to satisfy its domestic consumption, ranging from energy supplies to essential commodities like food grains and medicines. This dependence on imports has recently caused a major impediment because of the country’s dwindling foreign reserves. In addition, the country has a trade deficit of around $10 billion. Further revenue losses faced by Sri Lanka stemmed from the tax cut bonanza introduced by the government in 2019. The expect- ed results from these tax cuts were not realised and instead this had led to unprecedented revenue losses for the government. 

All these issues culminated in a serious Balance of Payment crisis, which worsened after the Covid-19 pandemic. It particularly impacted Sri Lanka because the tourism economy dried up, so the major source of revenue that the state depended on also came to a standstill. Further, the stubbornness of the government which refused to turn to the International Monetary Fund or other international banking organisations resulted in a consistent downgrading of credit ratings. Due to this decline, Sri Lanka was unable to issue International Sovereign Bonds. 

With the adamancy of not turning to the IMF for assistance, Sri Lanka was forced to look at alternatives that would enable it to deal with the grow- ing economic crisis. It restricted imports; however, this was not sufficient to bridge the external financing gap. Realising this, Sri Lanka sought help from two competing global powers – India and China. This was a viable option because Sri Lanka has had strong economic ties with both nations over the decades and in particular, the economic ties with China had become extremely robust over the last two decades. Over the last few years, Sri Lanka has been relying heavily on China to overcome its Balance of Payments troubles. To this end, it received a Foreign Currency Term Financing Facility to the tune of $1Billion from the China Development Bank. Colombo sought to boost its foreign currency inflow through the leasing of the Hambantota port to the Chinese Merchant Port. 

Further, due to the crunches faced by Sri Lanka brought on by the pandemic, coupled with its inability to borrow from the international capital market, the China Development Bank extended another $500 million to Sri Lanka in 2020. Sri Lanka used this loan in an unprecedented manner, wherein it utilised it to bolster its forex reserve position. Sri Lanka has a huge loan to repay to China and has 10 years within which it must do so with accrued interest.

Further, Sri Lanka is also stuck in a strategic trap laid out by China. The strategic trap is so convoluted that it has a spillover effect on the political and security aspects of the state as well. Moreover, China acts as a shield for Sri Lanka from criticism of its various human rights violations at the United Nations. This in turn leads to the understanding that it permits the authoritarian and heavily militarised model of governance. To term, the conundrum that Sri Lanka is facing as a mere debt trap would be incorrect. This is because the trap is allowing China strategic depth. The Chinese projects have a long-term strategic design that creates a hybrid model of civil-military activity in the country. This will turn into a major concern for Sri Lanka and the entire region. 

Sri Lanka and India have had cordial relationships for decades. But this relationship started to wane when Chinese influence started changing the political dynamics of Sri Lanka. Currently, the economic crisis faced by Sri Lanka has a multitude of ramifications from India’s perspective. This is because of the geographical proximity of the two countries. It makes India vulnerable to the various issues that citizens of Sri Lanka will face. 

Food shortage is one of these issues. This will in turn lead to widespread discontentment and will breed mistrust. It gives rise to the possibility of anarchy which would impact both countries, as it would cause a collapse of the constitutional machinery which Sri Lanka managed to establish after the horrific civil war. The breakdown in the constitutional machinery and rule of law will in turn give space for the creation of anti-social hubs in the state. This would have huge security repercussions for India. 

Further, the economic crisis could result in a mass exodus of people, prompted by the unavailability of medical facilities, necessities, and food supplies. Refugees will be forced to travel treacherous waters to reach the shores of Tamil Nadu. Initially, there will be a slow trickle of people, but it could grow to a flood as the days pass, and India will be forced to accommodate them on humanitarian grounds. This in turn would lead to economic implications for Tamil Nadu, which will be forced to turn to the union for assistance. Over time, refugee camps will place a heavy burden, fiscally and otherwise. These camps could also pose serious threats to India’s security especially if sleeper cells of LTTE get embedded in India posing as refugees.

India has always said that it shall follow the principle of “Neighbourhood First”. In response, Sri Lanka reciprocated with its “India First Policy”. This is beneficial to India because it helps address security concerns in the Indian Ocean region. Further, Sri Lanka is geographically the halfway point between the two main choke points of the Suez Canal and the Strait of Malacca, one of the major trade routes still in use. It is one of the main routes through which cargo traverses the narrow sea lanes of the Indian Ocean. 

Sri Lanka during this unprecedented economic crisis relied on both China and India for support. In the last two years, Sri Lanka has strategically started strengthening its economic relations with India and has sought to strengthen these ties. India has seen this as a window to expand its economic presence in Sri Lanka because of its increased dependence on China. The $500 million credit facility granted by India to import fuel was a measure to help in the current economic crisis. 

With this unprecedented economic crisis, Sri Lanka has strengthened its ties with China as well as India. The predominant reason for the change of heart is because Sri Lanka has been attempting a balancing act whereby it seeks to reap benefits from the geopolitical interests of China and India. However, it is a dangerous game that Sri Lanka is playing, trying to pit these states against each other especially when it does not have adequate bargaining power and is facing a severe economic crisis. It is pertinent to note that irrespective of the choices Sri Lanka makes on the restructuring of debt, defaults and making down payments on loans, the country’s dire economic condition will not change in the near future. In such circumstances, help offered by India and China will play a vital role in the survival of the state. Further, Sri Lanka must be extremely cautious about protecting its national interests when entering economic deals with China. In the long run, the country must facilitate trade investment and trade to address economic issues, rather than attempting to benefit from geopolitical rivalries in the region.