UPDATED April 12, 2022:
Sri Lanka announced on April 12, 2022 that it was temporarily suspend payments on its external debt of 51 billion dollars. Short of foreign exchange to import desperately needed essential goods including food, medicine and fuel, Sri Lanka’s finance ministry has said creditors, including foreign governments, are “free to capitalize debt payments”. interest due to them.
The South Asian island nation of Sri Lanka, currently going through its worst economic crisis in decades, is on the brink of bankruptcy.
The small island strategically located in the Indian Ocean Region (IOR) has struggled to emerge from years of civil war that ended in 2009 and a series of terrorist attacks in 2019. Now burdened with debts, Sri Lanka’s economic nightmare worsens daily with drug shortages, lack of basic food, lack of fuel and 10-hour power cuts.
lead the crisis
Its national debt weighs heavily. Sri Lanka must repay around $4 billion in debt in 2022, including a $1 billion International Sovereign Bond (ISB) maturing in July. However, its foreign exchange reserves fell to $2.31 billion at the end of February.
Colombo’s largest tranche of borrowing comes from foreign creditors through the ISBs, which account for 36.4% of total external external debt. Through repeated borrowing cycles since 2007, Colombo has accumulated $11.8 billion in debt through these ISBs.
Traditionally a nation dependent on large-scale imports for its most basic needs, the lack of foreign currency now renders Colombo unable to pay for vital supplies. The current situation across the country is dire, with shortages of basic commodities ranging from medicine to cement, food and fuel, and prices spiraling out of control.
Sri Lanka’s population of 22 million struggles to find even basic necessities like rice, milk and kerosene. The fear of riots over these items prompted the deployment of armed forces to oversee the distribution of fuel in many places.
Loss of income, onerous debt
Tourism in Sri Lanka has been left in tatters due to the COVID-19 pandemic, which has had a huge impact on the country’s revenue. The pandemic has caused tourism revenue to plummet from $7.5 billion in 2019 to $2.8 billion in 2021. Nearly 10% of the country’s GDP has been accounted for by the tourism sector, which has been a important source of foreign exchange for Sri Lanka.
ISBs are the main source of foreign creditors in the country. This is followed by the Asian Development Bank (ADB), which is Colombo’s second largest lender, providing 14.6% of the total debt. Next come the individual countries, namely Japan and China, which account for 10.9% and 10.8% respectively, lending around $3.5 billion each.
Japan has partnered with Sri Lanka’s socio-economic development to promote quality infrastructure and growth since Tokyo established diplomatic relations with Ceylon, as it was then called, in 1952. Before China became one of its biggest investors in 2008, Japan was Sri Lanka’s biggest donor. countries, providing grants and concessional loans.
Since the end of internal conflict in Sri Lanka in 2009, Japan has provided about 1.1 trillion yen ($8.8 billion) in help in Sri Lanka under various funding programs for conflict-affected areas.
Free and open Indo-Pacific
Sri Lanka is at the heart of the Indian Ocean region. As such, it is part of the shared vision of creating a Free and open Indo-Pacific. Its important geostrategic location roughly in the center of the Indian Ocean makes it a crucial geographical link between the African continent and South Asia, Southeast Asia and Oceania via the maritime corridor.
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It is well known for being essential to the security of sea lanes and for its role as a connectivity link to ports in South Asia to the Gulf and East Africa.
Tokyo has assessed Colombo as an essential partner in the regional maritime paradigm. However, the apprehension of being foiled by a strategically advancing Chinatests theories of its functional integration in the greater Indo-Pacific region.
In cumulative terms over the years, China is Sri Lanka’s fourth largest lender, behind Japan. Given Beijing’s debt-heavy diplomacy, one must check its expansionism spilling over into smaller, less-developed nations that are in dire need of aid and development assistance. With most of these nations, the trade balance is tipped desperately in China’s favor, facilitating the nation’s descent into the Chinese debt trap.
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One of the main reasons for Sri Lanka’s unprecedented economic collapse is its unsustainable debt, as well as the white elephant projects undertaken by Sri Lanka via massive loans from China. Unlike Japanese investments, China does not appear to help select investments for the country’s long-term public interest, relevance or effectiveness.
Japan’s proactive measures
As Sri Lanka’s third-largest foreign creditor, Japan should take proactive steps to ensure that the current economic crisis in Colombo does not turn into a predatory opportunity for China. Beijing’s debt trap strategy has already been used in the Indian Ocean region, Africa, the Caribbean and the Pacific Islands. If Beijing senses an existential vacuum, it could rush to further cripple Sri Lanka economically, rendering the island nation politically and militarily subordinate to Beijing.
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Moreover, allowing China to take full control of Sri Lanka via its mountain of debt could bode well for the rule of law, safety and security in the Indian Ocean and for policing. on the high seas. What is needed is a stronger hand to create a blue economy strategy in the Indian Ocean region that is conducive to marine health and mutually beneficial in the long term.
Author: Dr. Monika Chansoria
Dr. Monika Chansoria is a senior research fellow at the Japan Institute of International Affairs in Tokyo. The opinions expressed here are those of the author and do not necessarily reflect the policy or position of the JIIA or any other organization with which the author is affiliated. She tweets @MonikaChansoria. Find more articles from Dr. Chansoria here on JAPAN Striker.