Sri Lanka’s Political Shake-Up Is a Win for China

On Friday, Sri Lankan President Maithripala Sirisena withdrew his United People’s Freedom Alliance from the government’s ruling coalition without warning, fired Prime Minister Ranil Wickremesinghe, and appointed former President Mahinda Rajapaksa to the post. On Saturday, he temporarily suspended Parliament, plunging the country into a constitutional crisis.

Sri Lanka’s sudden political reorganization will empower the former strongman Rajapaksa, whose new party enjoyed unexpected success in the country’s February local elections and rattled the political establishment. His resurgence means a second chance for China’s attempts to play a dominant role in the island’s politics and development, and it serves as a significant impediment to U.S. efforts for greater engagement in the Indo-Pacific.

As president from 2005 to 2015, Rajapaksa used heavy-handed tactics to end the country’s decadeslong civil war, drawing accusations of war crimes, while encouraging large-scale Chinese investment to spur economic growth. His return to office undermines efforts to hold former military officials accountable for war crimes committed during the final years of Sri Lanka’s war against the Tamil Tigers and jeopardizes ongoing reconciliation efforts with the country’s large Tamil minority. Sirisena, Rajapaksa’s successor, was first elected on promises to dilute the power of the executive and to address the abuses of the Rajapaksa regime. Now the two men find themselves partners in power.

Under Rajapaksa, Sri Lanka engaged in an expensive and poorly conceived spree of infrastructure spending to stimulate growth. During his tenure, the country undertook numerous loss-making projects financed and built by China, including the Magampura Mahinda Rajapaksa Port in Hambantota and the Mattala Rajapaksa International Airport—known as the “world’s emptiest airport”—both in the country’s south.

Rather than spur sustained economic growth, these projects have driven Sri Lanka into unsustainable debt and jeopardized the country’s sovereignty. Foreign debt exploded from 36 percent of GDP in 2010 to 94 percent in 2015, prompting the country to pursue debt relief from the IMF in 2016.

In December 2017, Sri Lanka offered a controlling stake in the Magampura Mahinda Rajapaksa Port to China on a 99-year lease to service the country’s unsustainable debt, sparking alarm among international observers that China might be using debt leverage to gain strategic concessions in the Indian Ocean. The acquisition provided Beijing with a deepwater port in the region in which it can dock its navy, off the coast of its key regional competitor, India.

The Sri Lankan Finance Ministry warned in May that the country is approaching another debt crisis despite attempts to service existing agreements, and payments on interest and capital are projected to total $4.28 billion in 2019, accounting for about 5 percent of Sri Lanka’s annual GDP.

Yet the reaction against China’s debt-trap diplomacy has been sharp among numerous countries targeted by its Belt and Road Initiative, including Sri Lanka, Malaysia, and the Maldives. This presents an opportunity for Washington to loosen Beijing’s hold and to assume a greater role as development financiers in the Indian Ocean.

The United States has taken some promising steps toward improving its role in the region. The successful passage of the Better Utilization of Investments Leading to Development Act this fall more than doubled U.S. development finance resources and implemented critical reforms in the structure of the Overseas Private Investment Corporation, expanding the potential for U.S. development finance. And growing clarity surrounding the tenets of the Trump administration’s “free and open Indo-Pacific” vision, including the support of good governance, open access to seas and airways, transparent and fair agreements between nations, and improved regional connectivity provides a core framework for U.S. engagement in the region.

But these efforts could be thrown off balance by Rajapaksa’s return to power. Sri Lanka continues to maintain its economic relationship with Beijing despite the problems it poses, in large part due to a continued supply of development funds. Chinese investors have moved forward with a plan to construct a Chinese investment zone in Hambantota, the site of the loss-making port, despite local protests. And in July, Sirisena personally accepted a grant of 2 billion yuan ($295 million at the time) from Beijing on behalf of the Sri Lankan government, widely interpreted as an attempt to buy influence among policymakers. Sri Lanka seems increasingly unlikely to be pried out of China’s hold by U.S. efforts.

Rajapaksa’s appointment illustrates the limitations of U.S. economic diplomacy and development finance policy in the Indo-Pacific. Despite recent reforms and rhetoric, the Trump administration has yet to find a realistic alternative to the sheer scale and availability of Chinese financing for infrastructure development in the Indian Ocean. Until the United States is both willing and able to engage with countries in the Indo-Pacific on an individual basis and to provide mutually beneficial development financing on a scale comparable to China’s, leaders pursuing rapid growth and infrastructure development will continue to turn to Beijing for opportunities, regardless of concerns about predatory or coercive lending behavior.

If the United States and its allies are serious about playing a major role in the Indo-Pacific, U.S. policymakers must explore options to create more attractive and mutually beneficial investments for recipient countries. Rajapaksa may enjoy deep ties with Beijing, but it is not too late for Washington to rethink its approach to the remaining countries in the region.