Big Blow To India & Japan; Sri Lanka Shelves Two Key Infra Projects In Favor Of China?

Is Sri Lanka again dumping India and Japan for China? In a blow to New Delhi and Tokyo, Colombo has decided to shelve two multibillion-dollar infrastructure projects that were signed by the island nation’s previous government. 

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The Ranil Wickremesinghe government had in May 2019 signed a Memorandum of Understanding (MoU) with India and Japan to develop the new East Container Terminal (ECT). According to the terms, Sri Lanka holds a 51% stake while India and Japan share the remaining stake. The ECT has an estimated cost of between $500 and $700 million. 

Not just the ECT project, Colombo has directed to terminate a $1.5-billion Japanese-funded light rail project citing that the project is not “cost-effective.” 

Gotabaya Rajapaksa has asked the Transport Ministry to “terminate this project and close the project office with immediate effect”, his top aide P.B. Jayasundara said in a letter to the ministry, according to a report by AFP. 

The report further revealed that the Japan International Cooperation Agency (JICA) had already disbursed a loan of 30 billion yen ($285 million) for financing the first phase of the light rail project. 

Sri Lanka is facing economic woes with the worst debt crisis. According to the Department of Census and Statistics, the country’s economy has contracted 5.3 percent in the last nine months vis-a-vis a 1.9 percent growth in the last corresponding year. “The second-quarter GDP estimate has shown an unprecedented fall in real GDP by 16.3 percent… and it is the largest drop ever recorded in Sri Lanka’s history,” the department said in a statement.

With foreign reserves shrinking, a looming debt crisis on the country has now been expanded with the COVID-19 pandemic. Verite Research, a Colombo based independent think tank, stated that Sri Lanka took loans of $34 billion during 2005-2019 and 81 percent of these were for infrastructure development. Out of these loans, China was the largest lender for infrastructure accounting for 33 percent of total loans taken. 

Sri Lanka had relied heavily on China to construct a $1.5 billion port in Hambantota in the country’s south. After the port was operating at a loss and couldn’t generate enough revenue to repay the loan to Beijing, it was leased to China for 99 years in return for $1.1 billion which eased its position. Beijing further granted $500 million in aid to Colombo to fight the pandemic to help the looming financial crisis.

Sri Lanka had also requested various foreign governments, including India for a postponement of repayment of the debt as the island nation is reeling under a major economic crisis. Reportedly, the grant is a way to disprove China’s image of investing huge sums of money in mega projects through its Belt and Road Initiative (BRI) to later gain control over its strategic partners by piling debt obligations on them. 

“Many geopolitical analyses interpret this project as a ‘debt trap’ set up by China to gain control over Sri Lankan affairs. I want to prove that it is not the case and that this large-scale project will help improve the living standards of the people. Assist us in this endeavor,” Rajapaksa told the Chinese delegation, according to a statement released by his office.

Citing “seasoned financial observers” in Colombo, a Nikkei Asia report said that not only does shelving international commitments come with reduced sovereign ratings but also creates an international crisis. It further said that “the talk in the corridors of business is the government is scuttling the LRT to give it to the Chinese.”

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