China and the World

Coming full circle

Will the Rajapaksa family’s return to power see a rise in Chinese influence?

Gotabaya-Rajapaksa-w

Gotabaya Rajapaksa: new leader

Visitors to Sri Lanka often come to the country in the hope of spotting a leopard at Yala National Park, which boasts the world’s highest density of panthera pardus.

As of last weekend they’ll have the opportunity to observe some of the country’s other big beasts on the prowl, after the Rajapaksa family swept back into political power.

Gotabaya Rajapaksa won the presidential election on a platform of beefing up security after terrorist attacks in Colombo at Easter and more decisive economic policies after four years of messy coalition government. He is also pledging to appoint his older brother (and former president) Mahinda Rajapaksa as prime minister, plus put his other two brothers, Basil and Chamal, into prominent ministerial roles.

The family’s last stint in power, from 2005 to 2015, marked the end of a 25-year civil war with Sri Lanka’s Tamil minority. But it was also marred by allegations of rampant corruption, extrajudicial killings and a growing reliance on Chinese cash.

Since then Sri Lanka found itself becoming the lightning rod for criticism about ‘debt trap diplomacy’ under the Belt and Road Initiative (BRI) after the previous Rajapaksa administration had loaded up on loans on uneconomic projects struck on commercial rather than concessional terms.

Colombo ended up back in the arms of the IMF after succumbing to a balance of payments crisis.

Gotabaya’s win has analysts asking whether the Rajapaksa family can change its political spots and put Sri Lanka on a path to higher, more sustainable GDP growth.

They are also wondering what the victory means for the struggle for political influence in the region, especially between China and India.

Asian nations don’t have a stellar track record when it comes to family rule, with the Asian Financial Crisis of the late 1990’s erupting after decades of nepotism and crony capitalism.

Ahead of the vote, Basil Rajapaksa told the Financial Times that there were things that the family had learned from Mahinda Rajapaksa’s time as president and this week his brother promised to create a technocratic government that wouldn’t tolerate corruption.

The new president also said Sri Lankans would “remain neutral in our foreign relations and stay out of any conflicts among world powers”.

The widely respected governor of the central bank, Indrajit Coomaraswamy, has suggested the Rajapaksas learned lessons from being ousted from power in 2015. In a recent speech, he also highlighted how growing intra-regional trade is helping Sri Lanka to “rediscover our role as a hub in the Indian Ocean”. Chinese-funded ports in Colombo on the west coast and Hambantota in the southeast have started to make this more of a reality.

However, one of the consequences of Sri Lanka’s indebtedness was a $1.1 billion deal to hand over an 85% stake in the port at Hambantota to China on a 99-year lease via a debt-for-equity swap in December 2017.

Since then other nations that have been recipients of Chinese loans have complained about the terms and Sri Lankans will be watching to see if the new president follows the example of Malaysia, the Maldives and Pakistan in trying to reopen and renegotiate BRI-related deals.

In his manifesto Gotabaya promised to do so, saying that he would work with the Chinese to bring about a “win-win situation”. His administration would undoubtedly prefer the kind of agreement that his predecessor struck with Japan and India for investment in Colombo’s East Terminal in May. There, the three countries agreed to a share split giving Sri Lanka a 51% stake.

One thing that has changed since the family’s last time in office is China’s approach to lending money for BRI projects. While China’s critics argue that the ‘debt traps’ were deliberate, more sympathetic commentators put many of the problems down to Chinese inexperience in multilateral lending. In late 2018, Zou Jiayi, China’s Vice Minister of Finance, hinted the same, saying that Beijing would do more to assess debt sustainability, while still encouraging its policy banks and commercial lenders to make loans available.

A good example of this more nuanced approach is Export-Import Bank of China’s (Chexim) $989 million funding of a section of new expressway between Colombo and Kandy, the country’s second-largest city. The 20-year loan is Chexim’s largest in Sri Lanka and it was fixed earlier this year on a concessional rate of 2.5% per annum, plus a six-year grace period.

By contrast, when Chexim lent Mahinda Rajapaksa’s government $190 million to build the Mattala Rajapaksa International Airport, it did so at a widely reported rate of 6.3%.

Following its construction in 2013, the airport was dubbed the world’s emptiest after international carriers refused to fly there on safety concerns (it’s located on the flight path of migrating birds).

China’s determination to do things a little differently in future was also flagged by Foreign Ministry spokesperson Geng Shuang. After congratulating Sri Lanka’s new leader on his election, Geng said that the Chinese wanted to work with Sri Lankans on high-quality infrastructure projects based on “mutual respect and equality”.

India’s leader Narendra Modi will receive Gotabaya Rajapaksa on November 29 for what’s likely to be the Sri Lankan’s first overseas trip as president.

Of course, New Delhi will be keen to gauge whether the change in leadership is going to see Colombo draw closer to Beijing – something often attributed to the previous Rajapaksa administration

Newspapers including the Indian Express commented on the changes in the political scene, also noting that China’s “economic and strategic salience in the subcontinent” would continue to increase. Instead of trying to confront China more directly, it recommended that New Delhi worked with Colombo to find “a clear understanding of mutual red lines relating to national security and a political comfort level to discuss cases that fall within the orange zone”.

What India won’t want is a repeat of the situation in 2014 when Mahinda Rajapaksa’s government allowed Chinese submarines to dock in Colombo.

But there’s a consensus in the local financial markets that Sri Lanka will want to stick to its current foreign policy rather than revert to Mahinda Rajapaksa’s former one. The new government will try to adopt a more balanced foreign policy, given the changing nature of geopolitics in the region, the Asia Frontier Capital Fund suggested, while Colombo-based Asia Securities was also giving the new administration the benefit of the doubt, seeing it as a positive “in terms of bringing back more political stability”.

Other analysts said the president’s room for manoeuvre is limited by debt constraints. The IMF calculated recently that Sri Lanka’s public debt to GDP ratio is 90%, for instance, with China ranking fourth in terms of the government’s creditors on 9.1%, behind the Asian Development Bank, Japan and the World Bank.

However, if the new leader delivers the more inclusive political style and more balanced foreign policy that he is proposing, Sri Lanka will also have an opportunity to use its newly-improved ports to boost its economy.

The Hambantota port, operated by state-owned China Merchants, has concluded a range of new agreements improving Sri Lanka’s status as a trans-shipment hub. In January and February this year, for example, it signed terminal services agreements with South Korea’s Hyundai Glovis and Norway’s Hoegh Auto-liners.

In April, Chinese energy giant Sinopec won a tender to operate an oil terminal and provide bunkering services. And in October, Japan’s Nippon Yusen came on board to upgrade Hambantota’s capabilities in car shipments.

Further growth might be underpinned by new free trade agreements as well, following accords signed with Singapore, India and Pakistan over the past few years. At the top of the queue for future deals with Sri Lanka are two more Asian nations: Thailand and China.


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