by Natasha FERNANDO
Sri Lanka joined the Belt and Road Initiative (BRI) as early as 2013 when the project was globally launched by Chinese President Xi JinPing. Some of the large-scale infrastructure development projects that China had invested in Sri Lanka include the Hambantota Port, the Mattala International Airport, the Colombo-Katunayake Expressway, the Norochcholai Coal Power Plant, the Moragahakanda Multipurpose Development Project, the Matara-Kataragama Railway Line, and the Colombo International Financial City (CIFC). The CIFC and the Hambantota port are the flagship projects of the BRI.
Sri Lanka’s debt situation and geopolitical tensions
In April 2022, Sri Lanka was in pre-emptive debt default of foreign debt worth $78m, triggering the worst economic crisis in its history, resulting in the economy contracting by 7.8 per cent. Sri Lanka since then entered negotiations and debt restructuring plans to receive assistance from the International Monetary Fund (IMF) for a debt bailout. The first tranche of the IMF bailout package was received in March 2023, and the second tranche was approved in December the same year. As a condition of the IMF assistance, Sri Lanka must obtain commitments for debt restructuring from bondholders and major bilateral lenders such as China, Japan, Paris club creditors and India in order to stabilize the economy. By the end of year 2022, Sri Lanka owed USD7.4 billion to Chinese lenders according to the China Africa Research Initiative and USD 1.74 billion to India respectively. Currently there is intense geopolitical rivalry between China and India to gain diplomatic foothold in Sri Lanka.
While China has undoubtedly emerged as a significant geopolitical ally to Sri Lanka through the BRI, Chinese response towards debt restructuring has been slower and less favorable than that of neighboring India. The Export-Import Bank of China (EXIM) offered Sri Lanka a two-year moratorium on its debt in early 2023 while India had decided to provide Sri Lanka with a 10-year debt moratorium and a restructuring period of 15 years. There are also examples of diplomatic tensions to highlight the intensity of geopolitical rivalry. For example, Sri Lanka at the beginning of 2024, notified of a yearlong moratorium on foreign research vessels operating in its waters. It also denied a request from China’s marine scientific research (MSR) vessel, the Xiang Yang Hong 3 from entering Sri Lanka in 2024. Contrarily there was a ceremonial welcome to Indian Navy submarine INS Karanj in February this year which was a major diplomatic win for India.
Intense competition over Sri Lankan ports and BRI projects
As far as the large-scale development projects are concerned, during President Ranil Wickremesinghe’s recent visit to Beijing from October 16 to 20, Sri Lanka assured China of its ongoing commitment to the BRI. The joint statement issued emphasized Sri Lanka’s intent to actively participate in the project, despite its current debt challenges. The approval of a $4.5 billion refinery project in Hambantota by Sinopec, China’s state-owned oil giant, underscores China’s deepening economic ties with Sri Lanka. It is also the largest investment in Sri Lanka since its economic downturn in 2022.
China’s Central Commission for Discipline Inspection (CCDI) has announced that fighting corruption within the BRI will be a key focus in 2024. This decision comes amidst mounting allegations of corruption and concerns over the BRI projects becoming debt traps for smaller nations like Pakistan and Sri Lanka. The CCDI’s report underscores the imperative to root out corruption, deepen systemic reforms, and strengthen oversight institutions. This move reflects China’s commitment to addressing issues within the BRI and enhancing the integrity of its international investments. Such scrutiny must also extend domestically where the projects are hosted. The Front-line Socialist Party recently made accusations that the government had allowed the China Harbour Engineering Company (CHEC) to unlawfully obtain sand from the Port City project for the construction of the East and Jaya Container in the Colombo Port.
The CHEC also plans to introduce more green solutions for the construction of Colombo Port City in Sri Lanka, as part of the growing trend towards greener and more innovative infrastructure projects along the BRI. The project, being built by CHEC, spans 269 hectares of reclaimed land and is set to become the largest public-private partnership in Sri Lanka, with an estimated total investment of USD 1.4 billion. Incorporating sustainability and smart city concepts, the project aims to offer world-class offices, retail, and residential facilities across over 6.3 million square meters of building space. The Port City Colombo (PCC) recently held a special business networking session featuring Lord Marland, Chairman of the Commonwealth Enterprise and Investment Council (CWEIC), at the Port City Colombo Sales Gallery. Lord Marland expressed strong support for PCC’s investment promotion drive, emphasizing Sri Lanka’s resilience and economic growth while commending PCC’s progress in achieving key milestones despite challenges.
However, there remain issues of corruption domestically concerning the port city project. The decision of the Colombo Port City Commission to grant duty-free concessions to operate duty free shops in a special economic zone without a clear legal basis has come under legal scrutiny. The former chairman of the parliament’s Committee on Public Finance raised concerns about the lack of legislative backing for these concessions, as they were implemented through gazette notices rather than proper legislative processes. Additionally, there are broader concerns about the use of prerogative powers by ministers to change taxes and grant tax breaks, which adds to the uncertainty in Sri Lanka’s policy environment. Furthermore, tax breaks granted through laws with sweeping discretionary powers, such as the Strategic Development Project Law, have also been criticized. These issues have emerged to call for greater transparency about the domestic governance and policy frameworks applicable to BRI related projects.
Moreover, Sri Lanka is set to enhance its port infrastructure significantly, with plans for two deep water terminals within two to three years, including the Colombo West International Terminal (CWIT) in a landmark USD 650 million deal with India’s Adani Group and Sri Lanka’s John Keells Holdings and Sri Lanka Ports Authority. India’s Adani Group holds a 51% stake in the terminal, while Sri Lankan entities hold 34% and 15% stakes, respectively. Additionally, construction has commenced on Phase V of the Jaya Container Terminal (JCT), further boosting capacity with an investment of USD 32 million operated by CHEC. In response to the Sinopec investment in Sri Lanka and the CHEC stakes in the JCT, the United States also announced a $553 million loan for the development of the West Container Terminal at the Port of Colombo. These issues collectively demonstrate that India, China and the United States are heavily invested in gaining diplomatic leverage with Sri Lanka shaping its development trajectory.
Author: Natasha Fernando is an independent analyst from Sri Lanka with research interests in the Indo-Pacific.
