Is Sri Lanka truly ‘Non-Aligned’

by Kusum Wijetilleke
(kusumw@gmail.com)
and
Rienzie Wijetilleke
(rienzietwij@gmail.com)

Sino-Sri Lankan relations date back long before the much-acclaimed rubber rice pact of 1952. The Chinese Monk Faxian documented his visit to the island around the fourth century. King Alakeshvara, ruler of the Kingdom of Kotte, battled a Ming Dynasty fleet in the 1400s. His defeat and capture led to the ascension of King Parakramabahu VI, a known proponent for trade with the ancient Chinese empire. Chinese history has recorded that King Parakramabahu VI was nominated by the Yongle Emperor based on the advice of the Sinhalese present at the Ming Court and installed as King with the backing of Admiral Zheng He and his fleet.

The modern relationship gathered pace after Sri Lanka’s early recognition of the Peoples Republic of China, in 1957. Sri Lanka is also reliant on the United States, the world’s pre-eminent super power and recent comments made by the visiting Secretary of State, Mr. Mike Pompeo, reveal the very public divorce and necessitates a delicate balancing act on the part of Sri Lanka.

China’s economic success has been largely facilitated by the United States and other liberal democracies through multinational corporations operating within a free trade environment. “Chimerica”, a term introduced by Economist Moritz Schularick and Historian Niall Ferguson in 2006, is a term that describes the symbiotic economic relationship between the United States and China. This period of historic economic expansion, amid the booms and busts, is also broadly considered to be the height of the neo-liberal economic project. Chimerica allowed many long established American multinationals to continue their growth stories in the Far East, leading to a mass exodus of American manufacturing to China. In return, the world’s pre-eminent consumerist mecca swallowed up cheaper goods imported from the East. This seemed like a win-win situation; China would lift literally hundreds of millions out of poverty while the US satiated its hunger for cheap products and kept its hyper-consumerist economy trudging along. Yet by the time the 2008 financial crisis struck, China seemed the clear winner. American multinationals were creating extreme levels of wealth but with very little ‘trickle down’ to ordinary US citizens. Wages of the American middle class stagnated, and entire regions of the US, once proud cities built by the manufacturing industry, began collapsing.

Sri Lanka on the String of Pearls

In the meantime, the Chinese Communist Party (CCP) with its centralised structure of economic planning, had begun its next phase of development. The Belt and Road Initiative, had already taken root in Sri Lanka, well before its official launch by Chairman Xi Jinping in 2013. Starting in the 1970s, China had provided grants for infrastructure development to Sri Lanka, the most famous being the BMICH. However since the early 2000s, Chinese investments in Sri Lanka took the form of interest bearing loans and FDI. The Norocholai Power Station in 2006, the Hambantota Port Project in 2007, the Matala Airport and the Colombo Port City investment in 2010 are just some examples.

Sri Lanka was clearly of strategic importance to China and while the global economy ticked along there was little concern, the CCP had become a reliable development partner. The Chimerican project on the other hand, was running into trouble. Schularick and Ferguson note that even in the lead up to 2008, China had been building up its currency reserves and using these to buy more and more US securities. Essentially, China was saving while the US was over-spending. American over-spending was only possible due to cheap debt and cheap debt was always likely to lead to those troublesome economic “bubbles”.

In 2008, demand in the US plummeted and China had to fortify its own economy through an economic stimulus plan around the same time that the US treasury launched the American Troubled Asset Relief Program (TARP). The Chinese Central Bank, PBOC, lifted restrictions on commercial bank lending and the State Council invested somewhere in the region of 4 trillion Yuan, equivalent to USD 600 Bn, in infrastructure and welfare services between 2008 and 2010. A decade or so later and China has had to revisit a stimulus package by way of tax cuts and improving liquidity. China’s double digit GDP growth was always unlikely to last, the inevitable slow-down was managed by the CCP until the unforeseeable external headwinds of the Trump trade war and the pandemic. It is worth noting that the CCP did not publish an economic growth target for 2019, an unprecedented policy that continued through 2020. Despite a rebound in industrial output in the second half of 2020, official unemployment figures remain at around 6% while economists argue that the actual unemployment rate might be double this. Thus China, for all its incredible growth and financial might, is not infallible and must manage its risks and rewards like any other nation. Sri Lanka should take note, an endless Chinese appetite for Sri Lankan infrastructure lending is by no means guaranteed.

Cold War 2.0: The End of an Affair

The inevitable eastward shift of manufacturing, accelerated by neo-liberal trade policies and the automation and technological revolution, altered the lives of millions of working Americans. Many in these towns and cities took note when candidate Trump oversimplified the complex case of US international trade with a view of trade tariffs not shared by many economists. President Trump was always likely to accelerate the eventual divorce or evolution of the Chimerican relationship. The US Treasury department, having taken the historic step of labeling China a currency manipulator in August 2019, changed course a mere 5 months later as part of its Phase One trade deal. The US, UK and a few other European countries have taken steps to ban technology from Chinese telco giant Huawei in their 5G roll-out. These are all facets of the emerging Cold War 2.0. During the original Cold War, two major powers engaged in proxy wars, an arms race and the space race, in a battle for technological superiority. Cold War 2.0 might seem to be all about trade imbalances and intellectual property theft, yet the technological race is critical. China and the US are vying for superiority in various tech fields including semiconductors, quantum computing, 5G, artificial intelligence and data science.

The symbiotic economic relationship is at risk. What remains to be seen is whether Chimerica complete their divorce or arrive at an amicable compromise; an evolution of the relationship. The latter seems less contentious and will moderate short-term shocks to the global economy. However, the current signs seem to suggest the former, and Sri Lanka may find itself in the midst of a rather messy divorce.

Twin Alignment and Anti-Americanism

Secretary Pompeo’s visit and comments, certainly caused a stir. Sri Lanka has always had a strong center-left/ leftist political tradition and anti-Americanism comes with the territory.

The JVP began the festivities on the front page of a daily by stating the obvious: “Sri Lanka doesn’t need Foreign Interventions” (suffice to say, we actually do, we are inviting it in some quarters). The LSSP cautioned the government not to “fall into a trap”, Prof. Tissa Vitharana warning that signing agreements like the SOFA will lead to thousands of US forces utilizing the whole of Sri Lanka as a base. He stated, rather confusingly, that “even staying neutral is tacit approval” and urged the Sri Lankan Government to “take a non-aligned stance and support China”. Note the contradictions.

As much as Sri Lanka would prefer to be “non-aligned”, it remains very much aligned with the East Asian super power through borrowings, agreements and investments whilst performing an intricate balancing act with its number one export destination: the United States. The truth is that Sri Lanka is far from non-aligned, in fact one could argue that Sri Lanka has a ‘twin alignment’ with the two major economic and military powers in the world.

The United States is our top single-nation export destination by a considerable distance, and has also provided some $2.5 Bn in aid over the past several decades through various programmes and institutions. It also funds and thus holds considerable sway in many multilateral institutions such as the World Bank, Asian Development Bank and the IMF. Beyond its economic cooperation, the US also assisted Sri Lanka in some key aspects during the war on terrorism. Naval floating armories were tracked and destroyed using US intelligence, US naval blockades reduced the illegal arms trade in the Indian Ocean and supported the belated proscription of the LTTE in the post 9/11 world.

On the flipside, the US has also sponsored multiple resolutions against Sri Lanka in the United Nations Human Rights Council and even banned the current Army Commander. US backed INGOs and NGOs have long been perceived as assisting or being sympathetic towards the LTTE. Hand-wringing and fist shaking seem to have become the traditional Sri Lankan welcome for American officials visiting the country.

However, Sri Lankans should understand that regardless of the emotional reactions to western imperialism, the country’s economy cannot survive without its trading relationship with the United States.

A Belt around the Neck?

While the US has longstanding military and defense relationships with Sri Lanka, the escalation of hostilities with the LTTE led to restrictions in US military aid to Sri Lanka in 2007. China filled the gap providing direct military aid and equipment. China has since provided a range of modern armaments to the Sri Lankan military whilst also voting against the many US sponsored resolutions at the UNHRC. In return, Sri Lanka has steadfastly supported China at many diplomatic junctures including being one of 50 signatories defending its treatment of Uyghurs and Muslim Minorities in Xinjiang and most recently supporting China’s controversial National Security Law in Hong Kong.

Critics of Sri Lanka’s Sino-relations cite Chinese debt diplomacy and exhibit 1 is the Hambantota Port Debt/ Equity swap. Sri Lanka would appear to be a prime candidate for a potential Chinese debt trap, however the numbers on the surface do not support this claim. Analysts have shown that total debt to China is slightly above 10% of total debt and 60% of Chinese debt can be categorized as ‘concessionary’, though what constitutes ‘concessionary’ might be debated. Various commentators have stated that describing the deal as a debt/ equity swap is misleading. While Sri Lanka received just over USD 1 Bn from China for a 70% stake on a 99 year lease, the agreement did not involve the cancellation of loans from China. The Administration of the time used a small portion of this inflow to settle some short term debt unrelated to the construction of the Port and the remainder was used to bolster foreign exchange reserves.

It is inaccurate to claim that a Chinese debt trap is engulfing Sri Lanka, however non-concessionary debt as a percentage of total debt has been steadily increasing. The more you borrow, the higher your risk profile, the less concessionary future debt becomes. This is simply a natural law of debt and Chinese or not, Sri Lanka is falling into a debt trap. Balance of Payment deficits, budget deficits, investments in major projects without adequate planning, leading to under-performing assets and political manipulations of government revenue generation leads to a weakening of the nation’s credit worthiness. Government officials and ministers as well as members of the business community turn their noses up at conditional borrowings from institutions such as the IMF and view these conditions as suspicious. It is worth considering that these conditions may be better for the country’s long term financial stability.

As is often the case, this requires a trade off against short-term spending which complicates the political sphere. The facts are straight forward, successive Sri Lankan administrations have taken the easy route by simply borrowing to cover budget deficits and to shore up foreign exchange reserves without taking the painful steps required to bring some measure of financial discipline to government spending.

Another aspect of Chinese debt diplomacy that merits discussion are the projects themselves. In 2019, Pakistan cancelled a USD 2 Bn Chinese coal plant project as well as reducing their exposure to loans from Chinese entities. Myanmar scaled down a deep water port project from USD 7.3 Bn to USD 1.3 Bn having decided that debt levels were too high. A proposed Sino-Omani Industrial City that was proposed to cost USD 10 Bn has stalled completely. The Khorgos Gateway in Kazakhstan, 49% owned by China and meant to be the central ‘jewel’ of the modern silk road is basically an under-performing dry port surrounded by an empty 500 hectare field that was slated to become a special economic zone. Some of these projects should sound oddly familiar to anyone with knowledge of the Hambantota port project.

Lending for infrastructure projects require detailed viability studies to ensure the project is not only necessary but able to generate adequate revenue to operate whilst repaying loans. It seems that for many of these projects funded by Chinese banks, viability and revenue generation were not primary concerns for the lending institutions, another suspicious aspect of the BRI.

As a concept, the BRI raises many questions around the motives of the Chinese Communist Party. Sri Lanka had seemingly limited alternatives but to engage China as post war Sri Lanka needed significant investment and dependable partners. The CCP was really the only player and it just so happened that China already had very specific designs on Sri Lanka.

Neo-Imperialism

Politicians and the media, especially those on the center-left, are extremely suspicious about the MCC grant and the security agreements (SOFA and ACSA), accusing the US of using these agreements as tools establish military bases and take control of land assets amongst other nefarious motives. The idea that the US needs a grant of USD 500 Mn to exert influence on Sri Lanka seems farfetched. As noted before the US already has significant influence over Sri Lanka through its trading relationship with exports averaging USD 2.0 Bn annually, a tariff of a few percent would diminish Sri Lanka’s export revenue significantly.

The ACSA and SOFA may have different implications. Sri Lanka first signed a SOFA with the US in 1995 and if certain clauses in the renewal agreement are undesirable, for example those relating to protections and privileges for visiting American troops, these must be negotiated. Everything in Foreign Relations can be bargaining chip. The question to be asked is not whether Sri Lanka should sign the SOFA and ACSA, but what the government should ask for in return. A Foreign ministry official, as per Asia.Nikkei.com, stated that Sri Lanka did not want to seem too closely aligned with any nation and that signing a SOFA would lead to complications. Is Sri Lanka not already too closely aligned with China judging by this benchmark? There are other costs to bear in mind, namely the relationship with Sri Lanka’s immediate neighbor: India. The US has been forging ever closer relations with New Delhi, as part of the ‘American Pivot to Asia’ and India is the perfect foil for the US in the Cold War 2.0.

The over-arching narrative, driven by the exploitative and extractive effects of colonialism, is that the Western establishment spent the better part of the last few centuries exploiting the developing world. Modern day military invasions and interventions across the globe, political interference through international organizations and pressure brought by multinationals prove that the suspicion is warranted. More concerning is that many appear to view massive Chinese investment as purely transactional and any consequent cloud of imperialism as benign.

To believe in a benign form of imperialism is akin to the acceptance of a dictator as benevolent. Even if we ignore the 1989 massacre of Tiananmen Square and the hundreds of deaths, we must still contend with the power wielded by the CCP in Hong Kong, with student protestors now under arrest in the mainland. The Tibetan uprising led to over 85,000 deaths as per the CCP, Tibetans in exile claim the toll was much higher. Territorial disputes in the South China Sea with Indonesia, The Philippines, Malaysia and Vietnam and disputes in the East China Sea with Japan still linger. China would also prefer that its support for the Khmer Rouge is forgotten while the media highlights with the plight of the Uighur minority in the Xinjiang region.

It seems rational to turn a suspicious eye towards Chinese investment and deeper entanglement in view of the ever closer alignment. Sri Lankans will notice the increased numbers of Chinese workers in Sri Lanka and their effect on the local job market. There are multiple large scale government contracts being carried out by Chinese companies using Chinese labour and machinery that dilute the benefits to Sri Lanka. Why is there so much overt anti-Americanism when it is China that was able to maneuver itself in to a position from which to negotiate a long term lease of a port, a port that was funded by Chinese bank loans? There is already much speculation that the Colombo Port City will eventually become a Chinese addendum to Sri Lanka.

Sri Lanka has been a developing country for several decades since independence. The slow march towards the Sri Lankan promise continues. At this crucial juncture, with our economy in peril in the midst of global challenges and intrigue, can Sri Lanka afford anti-Americanism? Should the west not at least serve as a counterbalance to be used against the Chinese at the negotiating table? Certainly, Sri Lanka will have to continue to negotiate with the CCP, and must quickly become more effective at this negotiation to ensure the best possible bargain is struck, one that neither antagonizes the West nor betrays the East. The twin alignment remains in the balance.