Playing the long game

Friday, 30 October 2020 00:00 - - {{hitsCtrl.values.hits}}

In hindsight, the visit by US Secretary of State Mike Pompeo held few surprises. It was clear from the very onset that the second visit by a Secretary of State just a week ahead of a crucial Presidential Election was more about the optics back home than charting long-term engagement between Sri Lanka and the US.

US President Donald Trump has made China one of the key pillars of his re-election campaign and it was clear that Pompeo’s visit, not just to Sri Lanka, but also India, Maldives and Indonesia was done with a firm eye on politics back home. Struggling with his track record on tackling the COVID-19 pandemic in the US, President Trump needed to amp up other topics ahead of the election on 3 November.

The US Secretary of State’s remarks also need to be considered in the backdrop of heightened China and Taiwan tensions with the US moving to sell $ 2 billion worth of defence equipment to the latter. There are many aspects to this global interaction and Sri Lanka, at best, only plays a small role.

The reference to the China Communist Party as a “predator” grabbed headlines around the world and garnered a tongue-in-cheek response from the Chinese Embassy in Sri Lanka. President Gotabaya Rajapaksa also took the chance to speak to his core vote base, telling Pompeo that Sri Lanka would not compromise on its independence and sovereignty in its foreign policy – remarks that will no doubt reassure the nationalist bloc of the Sri Lanka Podujana Peramuna (SLPP) vote base.

Now that the overt engagement has cooled, it is likely that, at least in the short term, relations between the three countries will revert to the status quo. At least from Sri Lanka’s point of view, there is little space to make the kind of changes that Pompeo talked about.

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.

However, 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. In this aspect it would be beneficial to use reforms and diplomatic relations as outlined by Pompeo to connect to global value chains. COVID-19 is redrawing value chains and they will likely become more compact and Sri Lanka will have to be more competitive to attract sharply-dwindling FDI.

Therefore, Sri Lanka will have to play a balancing game – on one hand continuing engagement on key projects such as the Port City and the Hambantota investment zone, while also putting in place key legal and regulatory measures to promote exports and investment. For this, engagement with the US, which remains Sri Lanka’s single largest export market, will be important.

Sri Lanka has much to gain from keeping its diplomatic options open – not just with the US and China but also India and Japan. It has to be prudent and play the long game.