There’s a farcical note to the India-China tug-of-war playing out over Sri Lanka. A row over what Sri Lankans insist was substandard Chinese organic fertiliser that arrived aboard a Chinese cargo ship, whimsically named the Hippo Spirit, has strained ties between Beijing and Colombo.

Step back a few months earlier to when the Sri Lankan government suddenly declared the nation would go organic and overnight banned all chemical fertilisers, a move that threw tea growers and farmers into panic. Beijing stepped into the breach, sending a shipment of organic fertiliser. But when it arrived Colombo declared it contained harmful bacteria and refused to pay for the consignment.

India steps in

Amidst all this drama, India suddenly moved into pole position once again as Sri Lanka’s best friend, ready with a handout just when it’s urgently needed. India has come up with an immediate $900-million aid package and a $1.5-billion credit line. Deep-pocketed China, which was expected to bail its small island buddy out of trouble, is for now studiously looking the other way and ignoring the begging bowl thrust under its nose. Beijing may come good in coming months but there are no promises yet. “There was the fallout over the fertilisers but also the Chinese are hardening their lending terms everywhere,” notes a diplomat.

Once-affluent Sri Lanka is in desperate economic straits. It may seem hard to believe but the halt to chemical fertiliser use was actually intended to save on foreign exchange. Sri Lanka’s foreign exchange reserves are now down to $1.5 billion and without the Indian loan on its way it would be unable to pay for imports and that includes just about everything from fertilisers to automobiles, cosmetics and even milk powder. Sri Lankans have been confronted by empty shop shelves and even exploding cooking gas cylinders -- it was rumoured the cylinders were being filled with cheaper propane instead of the costlier butane usually used.

How much foreign exchange does Sri Lanka need in the coming year? The government has to repay $4.6 billion and the private sector $2.5 billion. That’s $7.1 billion, far more than the country has got right now. Some $500 million comes due January 18. Says WA Wijewardena, Sri Lankan central bank’s ex-deputy governor: “Unless a mega-inflow of $7-to-$8 billion is received, Sri Lanka will be in deep trouble.” He adds: “Neither India nor China can bail out Sri Lanka indefinitely. Thus, the problem gets compounded day by day.”

How did Sri Lanka land itself in this financial morass? The economy’s been lurching from bad to worse for years now even though the government likes to put most of the blame on the pandemic and ensuing shutdown of the tourism industry which keeps the country afloat. When the pandemic struck, the sector was only just recovering from the 2019 Easter terrorist bombings that killed 267 people.

Project revival

The Sri Lankans have been not-so-adeptly playing off India and China for most of the last decade. Now, India’s pulled ahead by a short nose and hoping to stay ahead. Meanwhile, it’s looking at getting several projects, stuck for years, moving again. Most importantly, there’s the Trincomalee Oil Tanks Farm in which IndianOil hopes to take a major stake via its Sri Lankan subsidiary. Finalising the oil tanks deal is a precondition for unlocking the Indian $1.5-billion credit line.

Besides that, India has moved to scuttle a renewable power project on three small Jaffna peninsula islands close to India that’s been the subject of a fierce tussle between India and China. “We offered a much cheaper project but the Chinese insisted their one was backed by the Asian Development Bank and couldn’t suddenly be terminated. This particular battle ended with a clear win for India which didn’t want the projects so near its mainland,” said another diplomat.

Warming ties

Both India and China have been playing their hand carefully for an advantage in Sri Lanka. External Affairs Minister S Jaishankar has just held a virtual meeting with Sri Lankan finance minister Basil Rajapaksha (reputedly the smartest of the ruling Rajapaksha brothers). Basil made an earlier trip to Delhi in early December when he met Prime Minister Narendra Modi. From the Indian side too, there have been frequent interactions, signaling ties have been warming. Foreign Secretary Harsh Shringla was in Colombo in October followed soon afterwards by army chief Gen Mukund Navarane.

Don’t imagine for a moment, though, China’s out of the game. Chinese Foreign Minister Wang Yi made quick trips to the Maldives and Sri Lanka in early December and visited Colombo again in early January to mark the 65th anniversary of diplomatic ties.

Also, it was the Chinese who pulled the rug from under India in early 2021 and took back the Colombo Port’s East Container Terminal project. A joint India-Japan consortium which was supposed to handle the project suddenly found it was out on its ear. As a consolation. India was offered the West Container Terminal which will be executed by the Adani Group. India is distinctly unhappy about this consolation prize because it will need far fatter investment than the East Coast Terminal which has some infrastructure already up. At a different level, just this week, India completed a housing project in the plantation areas mostly for Tamil-origin workers.

The IMF option

What’s the overarching solution for Sri Lanka’s economic woes? That’s easy enough. Take that begging bowl and head to the IMF. But the Rajapaksha brothers have been looking at every manoeuvre possible to avoid this. Yes, IMF loans do come with onerous conditions. Also, crucially, Rajapakshas don’t want to give up their authoritarian ways and answer questions about how they’re spending the country’s money. But they aren’t likely to have any other options. They’ve been printing money at high speed and that’s forced a massive devaluation of the Sri Lankan rupee. The nation’s credit rating has also fallen even further into junk territory to CCC.

Indian diplomats reckon India can’t match China when it loosens its purse-strings. So what’s the solution? In the long term, India must strengthen its economic ties and allow freer trade with Sri Lanka, even though businessmen in this country will howl. India’s got geography on its side. It must use that to build a strong economic relationship with Sri Lanka so even China’s big-time spending won’t leave it lagging in second place in the diplomatic race.

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