No sooner than Parliament approved the controversial Colombo Port City Commission Bill in May 2021, some Sri Lankans took to social media to express their (somewhat misguided) belief that the island ceded part of its sovereignty to China. 

The new law will set up a dollarized special economic zone to fast-track investments and protect investors from currency depreciation. It would also be a testing ground for new ways of running government processes to improve the ease of doing business. The public discourse around the Colombo Port City Commission Bill was largely misinformed and wrongly portrayed as giving up sovereignty to China. The law has many flaws. There were several constitutional inconsistencies, and the direct Presidential appointment to the commission is a serious flaw as it exposes the already broken public service and undermines judicial independence, critics argue. Ceding sovereignty to China, however, was not one of them. Colombo Port City will emerge on 269ha (2.69 sq. km) of land that China Harbour Engineering Company (CHEC) spent $1.4 billion to reclaim. The reclaimed land extent is just under a tenth of the 37.31 sq. km total area of the commercial capital yet promises to propel the economy towards the next stage of development. The government expects the Port City will attract $15 billion of investments and add $12 billion to Sri Lanka’s gross domestic product each year (Sri Lanka’s GDP at current market prices was $81 billion in 2020). CHEC Port City Colombo, the project company, will get 116ha (1.16 sq. km) on a 99-year lease to recover reclamation and development costs. The Sri Lankan government will develop 91ha (0.91 sq. km) as public spaces and offer a balance of 62ha (0.62 sq. km) for commercial development. 

Sri Lanka’s perceived foreign relations largely depends on the government in power. The Rajapaksa regime from 2005-15 and the current administration the family leads are perceived as pro-China and anti-West, whereas the previous government led by the UNP tends to be more Western in outlook. It was not surprising then that China’s large-scale infrastructure projects suffered setbacks during its term in power. When it comes to India, again, perceived relations with the giant neighbour vary from regime to regime. 

With border tensions simmering between China and India in recent times, their geopolitical power play has also intensified in the region, with India stomping out of the China-led Regional Comprehensive Economic Partnership (RCEP) trade agreement. India has already expressed concern about China’s strategic investments in the island, including the Port City, but Sri Lanka cannot ignore China, nor can it ignore India. Perceptions and billboard nationalism aside, where truly does Sri Lanka stand with the two Asian economic powerhouses China and India? And how should Sri Lanka play the game if it is to be part of the unfolding Asian miracle, albeit devastatingly interrupted by Covid-19?

“For Sri Lanka, with a functioning bilateral trade pact with India already in place, a steady integration process with Southeast Asian countries along the Bay of Bengal and beyond with an eye on RCEP membership in the longer run seems the most beneficial ‘Asia-centric’ road map,” Dushni Weekaroon and Kithmina Hewage write in the East-West Centre’s Asia Pacific Bulletin in an article titled: Sri Lanka’s Asia-centric Focus in a Contested Bay of Bengal Region. Weekaroon is the Executive Director at the Institute of Policy Studies, a think tank, where Hewage is a Research Economist. “To get there, the country needs to tread cautiously and insulate itself from aligning in favour of one major regionalpower over another,” the authors said, even suggesting a better place than any to start realigning its foreign policy. “The starting point is to put its economic house in order, and decrease dependence on foreign loans and FDI for its strategic investments in infrastructure connectivity”. While other contributors to the same journal expressed concerns about Sri Lanka’s foreign affairs and China’s perceived overbearing on the island and how that can prevent greater intra-regional unity and connectivity, Weerakoon and Hewage argue differently. 

There are several narratives holding sway both here and abroad. The first is that small yet strategically located developing countries like Sri Lanka are easily manipulated by powerful countries. The second is that China forced Sri Lanka to cede strategic territory – first the Hambantota port and now Colombo Port City – after luring the debt-ridden island into a debt trap to advance its Belt and Road Initiative. It certainly appears that the odds are stacked overwhelmingly in favour of China to bind Sri Lanka firmly to its ambitious Belt and Road Initiative, a $1 trillion infrastructure project covering 70 countries and territories, including land and sea connectivity in the Bay of Bengal.

The current administration came to power on a rising tide of populism, promising to halt the sale of strategic assets. It dashed to bits plans for an India and Japan-backed port terminal in Colombo, a Japanese funded light rail project and a $480 million Washington-based Millennium Challenge Corporation grant. The government declined these projects by citing concerns about raising additional debt and compromising national interests, branding the previous regime as betrayers and traitors. Then, however, the government went ahead with the Colombo Port City Commission bill to fast-track the China-backed project giving credence to the view that Sri Lanka was indeed in China’s grasp, caught in its debt trap. Opposition lawmakers were quick to paint the government as traitors. “They have long professed their love for the country. Some offered to lay down their lives against the MCC deal. Some went on hunger strikes. But now, without even the slightest protest, they raised their hands to pass this act that betrayed the country,” a leftist politician told a news conference. “All of these people will go down in history as people who contributed to this betrayal,” he added. The misinformed narrative holds sway, but is Sri Lanka in a debt trap, and how deep is it?

Weerakoon and Hewage point out that Sri Lanka is not caught in a debt trap, nor are its foreign alignments obvious. “Sri Lanka’s (foreign policy) alignments will not be so clear cut for several reasons. First, the ruling government will be aware of past ‘mistakes’ in balancing relations with its neighbouring giants,” Weerakoon and Hewage (the authors) contend. The Rajapaksa regime’s perceived pro-China, and anti-India stance was a contributory factor towards India backing a government change here in 2015 which brought the UNP-led coalition to power. So, when Sri Lanka’s incumbent President Gotabaya Rajapaksa came to power, his first foreign visit was to New Delhi as if to set the tone for future engagements. Sri Lanka also needs India’s support to counter international pressure, mainly from the West, on human rights and the devolution of political power. “India’s goodwill is vital; historically, international pressure on Sri Lanka has been dealt with effectively only with India’s tacit approval,” the authors argue. The second reason why Sri Lanka’s pro-China is not as mutual as most would assume is that the embattled, heavily indebted economy needs all the help it can get, especially now with the Covid-19 running amok. With public debt at 90% of GDP and half of that in foreign currency, Sri Lanka will depend on both China and India for credit relief. China and India are Sri Lanka’s largest creditors and Weerakoon and Hewage show that both countries do not overshadow each other in terms of influence. 

China has agreed to a $500 million loan top-up and India has settled for a $400 million swap arrangement and an additional $1 billion is pending. China and India’s contributions are nearly similar. For instance, India accounts for 13.5% of Sri Lanka’s bilateral debt and China for 12.2%. An EXIM Bank loan from China could take its share of bilateral debt to more than 50%. However, in terms of total debt, China still ranks evenlower at 9.6%, “debunking the view”, the authors advance, “that Sri Lanka is being caught up in China’s debt-trap diplo “- macy”. In terms of foreign direct investment, China is the largest investor in Sri Lanka at 16.7% (of total FDIs) followed by India at 12.9%. “It is clear that both countries are vital to Sri Lanka’s long-term economic interests,” Weerakoon and Hewage write. “Balancing Sri Lanka’s India and China interests while seeking engagement with a wider spectrum of economic opportunities in Asia will require deft political and diplomatic skills,” they point out. 

At stake are many things that would uplift the lives of citizens, including gaining access to RCEP (Regional Comprehensive Economic Partnership) which covers 15 AsiaPacific countries and home to 30% of the world’s population with a combined GDP of $26.2 trillion as of 2020: an important opportunity Sri Lanka can ill-afford to miss. Improving relations with China and India separately is also an option, especially in trade, to secure imports at competitive prices, but mainly to access their markets and supply chains. In terms of exports, India accounts for 6.4% of Sri Lanka’s exports and China 2%, a disappointing low for both countries, but a trend Sri Lanka will want to improve for higher economic growth. “The advantages to be had from closer integration with them as a source of new markets, development finance, FDI, and technology transfer is obvious. Thus, recent policy pronouncements that Sri Lanka’s foreign policy will be Asiacentric makes good sense,” Weerakoon and Hewage said. As to the follow-through, we can only hope so!