Recent developments hint at "light at the end of the tunnel" for Sri Lanka, possibly translating to regional economic stability and certainty, with China and India seeming keen on assistance.
Image courtesy of NewsIn.Asia
The visit of the Chinese Foreign Minister Wang Yi to Sri Lanka from January 8 to 9, and the Indian Foreign Minister S.Jaishankar’s recent phone call to his Lankan counterpart G.L.Peiris, have given the impression that both Asian giants are keen on helping Sri Lanka come out of the economic woods it has been in in the past year.
Due to a variety of factors, including COVID-19 and gross mismanagement, Sri Lanka is now frightfully short of dollars even to import essentials. The disastrous decision to shift wholesale to organic farming immediately, has led to predictions of a food shortage in April 2022. Government’s callousness has led to an unprecedented rise in prices of essentials.
The EconomyNext website quoted the Central Bank Governor, Ajith Nivard Cabraal, to say that the bank had sold about 3.6 tonnes of gold out of a 6.69 tonne stockpile it had at the beginning of 2021, leaving it with around 3.0 to 3.1 tonnes of gold. The gold sale was to boost liquid reserves, Governor Cabraal said.
Sri Lanka’s gross foreign reserves had dropped to US$ 1.5 billion in November 2021 but recovered in December to touch US$ 3.1 billion. And yet the demand on the dollar remains high in an import dependent economy.
While it is still not known precisely what the visiting Chinese Foreign Minister will bring to the table, Colombo is expecting big ticket investments. Both China and Sri Lanka had brushed the nasty organic fertilizer import row under the carpet. The row over the allegedly contaminated fertilizer consignment had led to the Chinese company’s threating to go for international arbitration and Sri Lanka’s going to court. Eventually, Sri Lanka coughed up US$ 6.9 billion to settle the matter out of court.
According to the Sri Lankan Ambassador to China, Dr. Palitha Kohona, two big Chinese companies have sent their representatives to Sri Lanka. He told Daily Mirror: “Power China is one. KY Electric is another. Power China is interested in building residential units in Colombo and outside. KY Electric is interested in renewable energy. We held talks with China Harbor, China Great Wall, Power Steel, etc. These are only a few of them. All of them have shown keen interest in investing in Sri Lanka catering not only to the domestic market but also to the wider regional markets. We have been encouraging them.”
Kohona further said: “One of the reasons for nothing tangible to be eventuated so far is the inability to send their specialists to Sri Lanka to assess the situation at ground levels. Once travel is restored to some extent, we can expect many of these companies to show greater interest in Sri Lanka. We have also encouraged travel companies to invest in Sri Lanka. One company with a client base of over 40 million is interested in developing resorts in Sri Lanka, like the resorts in southern Europe or Hainan Island. We can expect it once things return to some sort of normalcy. Many other companies will make a beeline to Sri Lanka.”
These investments may work as catalysts for investors from elsewhere, whether they are from the United States, Europe, Russia, Australia, Japan and Korea, Kohona added. As regards investment in the China-built Colombo Port City, the envoy said: “ A very serious offer has been made by Power China and China Harbor. It is quite likely that over the next few months, they will invest substantial amounts in the Port City. Again, this will be a flagship investment which will hopefully be an attraction to others to follow-suit. We are hopeful that companies from India, Europe and the United States will follow these big investments in the financial center, the Marina and in the Convention Center.”
India’s interest in giving a helping hand to Sri Lanka was evident when its Foreign Minister, S.Jaishankar, called his Lankan counterpart, G.L.Peiris, on the phone to say that “India will support Sri Lanka in these difficult times.” This has heightened hopes that India will, at the earliest, deliver a US$ 1.9 billion financial aid package to Sri Lanka.
In the first week of December 2021, the Lankan Finance Minister Basil Rajapaksa had had two sessions spread over two days with the Indian Finance Minister Nirmala Sitaraman and Foreign Minister Jaishankar in New Delhi. Though the expected meeting with Prime Minister Narendra Modi did not come through, the Lankan Finance Minister came back to Colombo with a four-point economic cooperation plan.
India indicated that, apart from the existing US$ 400 million swap, there will be a US$ 500 million line of credit for the purchase of oil, and a US$ 1 billion credit line for purchases of medicines and food. It was agreed that the issue of the refurbishing and running of the 99 giant oil tanks in Trincomalee would be settled to mutual satisfaction. The two sides further agreed that modalities to realize the four-point package would be “finalized early, within a mutually agreed timeline.”
As planned, India and Sri Lanka reached an agreement on the oil tanks and signed an agreement after securing cabinet approval. Giving the basic contours of the agreement, the Lankan Minister of Energy, Udaya Gmmanpila said that out of the 99 tanks, each with a capacity of 12,000 mt, the State-owned Ceylon Petroleum Corporation (CPC) will get 24 tanks to develop and use independently of the Lanka Indian Oil Corporation (LIOC); 14 of the tanks, currently used by the LIOC, will be leased to the LIOC for 50 years; and the balance of 61 tanks will be managed by the Trinco Petroleum Terminal Ltd.,(TPTL), a joint venture of the CPC and LIOC to be launched soon. In the TPTL, the CPC will own 51% of the shares and the LIOC will hold 49%. The TPTL will be a subsidiary of the CPC.
In effect, 85 out of the 99 tanks will be under the control of the CPC directly or indirectly. And the LIOC will manage only 14 tanks, Gammanpila said.
A leading Buddhist monk has challenged the agreement in the Supreme Court, and the opposition has called it a sell because it wants the government to nationalize the tanks given to India in 2003. But the government is confident of seeing the deal through parliament later this month.
The Lankan Energy minister considers it a “historic” agreement since no government before had been able to get the tanks that were given wholesale to India in 2003. The Indian government has described the deal as a “milestone”. India did not consider the new agreement as a loss because it was committed to run the tanks as a joint venture way back in July 1987 as part of the Indo-Lanka Accord. This commitment found fruition 35 years later.
A regards the other elements in the four-point package agreed to during Basil Rajapaksa’s New Delhi visit, including the credit lines, both countries are working on the technicalities and modalities. Officials are not certain when each of them will see fruition, but work is in progress.
Therefore, while China has ambitious plans to boost the Lankan economy through investments and credit lines, so is India. The international competition to woo Sri Lanka, given its strategic location in the Indian Ocean, should help it come out economic distress in 2022.
This article by P.K.Balachandran appeared in NewsIn.Asia on 8 January 2022. Balachandran is a senior Indian journalist based in Colombo and has been writing on South Asian issues for over 20 years.
