A testing balance

Monday, 26 October 2020 00:00 - - {{hitsCtrl.values.hits}}

Sri Lanka is set to get caught in global crosshairs this week as US Secretary of State Michael Pompeo touches down in Colombo to meet with President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa. The visit is expected to put Sri Lanka’s relationship with China squarely on the table but it is unlikely that this will result in significant change.

This will be Secretary Pompeo’s last circuit run before the US presidential elections on 3 November. In addition to Sri Lanka, he will travel to India, Maldives and Indonesia. Ahead of his visit, it was reported that the US will urge Sri Lanka to make “difficult but necessary” decisions to secure its economic independence for long-term prosperity. According to top officials the US stands ready to partner with Sri Lanka for its economic development and growth.

If Secretary Pompeo does indeed take this stance when he meets top Sri Lankan officials it could leave the country facing an extremely tough choice. Struggling with slow growth even before the pandemic, chronic Budget and trade deficits as well as high debt Sri Lanka has few options open if it wants to meet $ 4.5 billion in debt repayments next year. COVID-19 has made it next to impossible for the Government to return to international financial markets to borrow and China remains one of its most important partners, even helping to prop up reserves this year via a $ 1.1 billion loan from the China Development Bank.

Given Sri Lanka’s high debt to GDP ratios, there is little space for the Government to continue depending on loans for development projects. Instead it needs to seek investors. Unfortunately Sri Lanka’s track record for attracting Foreign Direct Investment (FDI) is unimpressive and it is facing ever-stronger competition from the rest of the world. Therefore continuing engagement on key projects such as the Port City and the Hambantota investment zone is a priority. For this and continued support in international for a, the Government will likely continue to turn to China. When the two sides engaged in a high level meeting earlier this month, even resumption of a stalled free trade deal was discussed.

However, the US remains Sri Lanka’s single largest export market, in addition to other critical diplomatic ties. In the past, Sri Lanka has struggled to balance the US, China and India nexus. Relations with the latter nearly froze over after India voted for a United Nations Human Rights Council (UNHRC) resolution pre-2015 and while engagement has been restored, Sri Lanka is still dependent on New Delhi to approve a $ 1 billion swap and assist in other economic support.

The reality is that even though the US may be keen to see more distance in the relationship between Sri Lanka and China, without critical investment opportunities being proffered it will simply not be able to diminish China’s attraction. Sri Lanka is well-aware of its strategic importance and stands to benefit if it is able to balance these super powers. Yet with COVID-19 adding more strain, maintaining a perfect balance may simply not be possible.