Chinese checkers

CHINA has become a major part of Sri Lanka’s development discourse and thereby intrinsically linked with its political landscape. The impact of billions in loans from China continues to play a key role in the country and will likely do so irrespective of which party wins the day on 17 August.

Locally and internationally, China has come to the forefront and Sri Lanka has had to grapple with this reality. On one hand China is funding investment and development around and world and Sri Lanka cannot sit back and miss crucial opportunities but on the other it cannot also get too close and risk being drawn into geopolitical crosscurrents.

On a practical level it also has to ensure that the presence of Chinese companies is transparent, accountable and in line with the laws of the land, a challenge that has proven to be particularly thorny.

Corruption is perhaps the biggest hurdle to open relations between the two countries. The clear involvement of former President Mahinda Rajapaksa’s Government in projects mired in corruption allegations makes it a hypersensitive topic.  But the Government has to shake off these issues fast to steer a careful path in making sure projects and future investment do not face negative consequences.  Already China has lent Sri Lanka an estimated $ 5 billion for massive infrastructure projects over the last seven years, making it the country’s main development partner.

With many of the Rajapaksa regime’s projects, such as the Mattala Airport, failing to earn their keep, the Government is faced with the challenge of tough fiscal consolidation to manage its medium-term debt repayment obligations. But this has to be balanced against engagement with China that is also crucial for Sri Lanka to expand its exports and grow economically in the long term.

The Government clearly understands this as it chose to accept a $ 500 million loan to construct the third phase of the Colombo Outer Circular Highway last month despite a decision to reduce its cost by $181 million. The savings will be funnelled to alternative road projects, the Highways Ministry has decided, to prevent denting relations with China.

It was reported this week that the Sirisena-Wickremesinghe Government had made the first application for concessionary funding from the China Exim Bank to fund consultancy services of the Matara-Hambantota extension of the Southern Expressway. The project was initially put on ice by the incumbent Government before it was ceremoniously flagged off by President Sirisena earlier this month.

Interestingly, statements released by the Highways Ministry at the time acknowledged that the financial feasibility for the venture was thin but the Government had agreed to go ahead because it was the only way to make projects already on the ground, namely the Hambantota airport and highway, economically viable.

Clearly throwing good money after bad projects will be something to watch closely and the move comes hot on the heels of reports that the Government is also looking at concessional funding from Japan to refinance as much as 70% of the loans obtained from China.

Sri Lanka has to join the world in doing smart business with China. But it faces fresh challenges with entities such as the Chinese Chamber of Commerce playing to the gallery about jobs created by Chinese-funded projects, which could well be seen by many as political in nature. Balancing all these elements is crucial to the health of future relations.