{"id":59229,"date":"2020-09-21T12:30:29","date_gmt":"2020-09-21T02:30:29","guid":{"rendered":"https:\/\/www.aspistrategist.ru\/?p=59229"},"modified":"2020-09-23T15:02:12","modified_gmt":"2020-09-23T05:02:12","slug":"will-multilateral-development-banks-step-up-to-meet-sri-lankas-funding-gap","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/will-multilateral-development-banks-step-up-to-meet-sri-lankas-funding-gap\/","title":{"rendered":"Will multilateral development banks step up to meet Sri Lanka\u2019s funding gap?"},"content":{"rendered":"
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After the outbreak of Covid-19 earlier this year, some predicted that the pandemic\u2019s economic reverberations in Sri Lanka would lead China to increase its already considerable funding<\/a> to the island state. Indeed, as early as mid-March 2020, the China Development Bank agreed to lend Sri Lanka US$500 million<\/a> when it upsized an existing facility<\/a> signed in 2018. More recently, the CDB agreed to lend a further US$140 million<\/a> to the state-owned Bank of Ceylon.<\/p>\n

Predictions of Sri Lanka\u2019s closer ties with China have redoubled<\/a> since the sweeping electoral victory of the Sri Lanka Podujana Peramuna\u2014the party of President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa\u2014in the country\u2019s legislative elections on 5 August.<\/p>\n

Several factors could propel Sri Lanka and China to forge closer relations, but there are also some countervailing pull factors that may limit the extent of China\u2019s funding and influence. An underappreciated pull factor is the contribution of multilateral development banks (MDBs) to alleviating the country\u2019s economic burdens. During the Covid-19 pandemic, MDBs like the Asian Development Bank have contributed far less to Sri Lanka than they have to other South Asian countries. This in turn has amplified China\u2019s bilateral role in the country. Increased funding from MDBs could reduce the depth of China\u2019s future footprint in Sri Lanka.<\/p>\n

A recent paper<\/a> by Chatham House, which I co-authored with other Sri Lankan colleagues, challenged the narrative that Sri Lanka is mired in a Chinese debt trap\u2014noting that debt to China amounted to less than 6% of GDP in 2018. Nevertheless, it also recognised the risk of a debt trap in the future, and critics have pointed out that loans from China come with fewer procedural safeguards<\/a> than those from MDBs.<\/p>\n

The predicted negative economic growth<\/a> in Sri Lanka this year as a result of the global pandemic will add pressure to the country\u2019s debt-to-GDP ratio, which stood at 87%<\/a> last year, and to its ability to service that debt with limited dollar reserves. These concerns are despite Sri Lanka\u2019s success in containing the pandemic<\/a> due to early and decisive steps<\/a> like closing its borders in March and an active contact tracing system. At the end of July 2020, there were fewer than 2,900 cases and 11 deaths.<\/p>\n

Sri Lanka\u2019s challenging economic reality is among the strongest push factors towards its greater dependence on Chinese bilateral aid. This is particularly because of China\u2019s reliably swift responses\u2014a speed that was also evident after the devastating terrorist attacks on Easter Sunday last year, when China was the first<\/a> country to relax its travel advisory about Sri Lanka.<\/p>\n

Further push factors include the new government\u2019s need to garner global support to defend Sri Lanka\u2019s human rights<\/a> record in international forums, increase foreign investment, modernise its technological capabilities and meet its significant infrastructure gap<\/a> (at an estimated cost of US$24 billion based on a 2014 World Bank study<\/a>) through existing projects under the Belt and Road Initiative and new development projects. An additional push factor is the growth of China\u2019s public diplomacy<\/a>, including with Sri Lanka\u2019s majority Buddhist community.<\/p>\n

On the other hand, the logistical difficulties faced during the pandemic by many construction and other companies in Sri Lanka point to the country\u2019s need to diversify its supply chains from China. Other pull factors that sustain Sri Lanka\u2019s non-China relationships, and can thereby limit China\u2019s influence, include Sri Lanka\u2019s need for economic assistance from diverse sources and its multifaceted security relationships with India<\/a> and other partners. More generally, pull factors encompass Sri Lanka\u2019s need to give visible contours to a non-aligned<\/a> foreign policy that it has pledged<\/a> to continue, particularly in view of spiralling US\u2013China tensions.<\/p>\n

One pull factor that warrants special mention is the extent to which international financial institutions are aiding, or could aid, Sri Lanka. After the outbreak of Covid-19, Sri Lanka sought US$300 million from the Asian Development Bank<\/a> and an additional amount from the Asian Infrastructure Investment Bank, and renewed its discussions with the International Monetary Fund<\/a>. Sri Lanka is yet to receive substantial funding from MDBs, relative to its neighbours. As of the end of July, MDBs had committed US$386 million to Sri Lanka, compared to, for example, the over US$1 billion allocated to Nepal.<\/p>\n

Although media reports have highlighted<\/a> Chinese assistance to Sri Lanka, these reports neglect a comparative perspective. In effect, Chinese loans in this pandemic year are helping Sri Lanka to close its funding gap from MDBs. The role of multilateral aid in shaping China\u2019s post-Covid footprint in Sri Lanka is particularly significant because of opposition in some quarters to bilateral assistance, particularly from the US\u2014which has offered a compelling US$500 million<\/a> grant for transport and land administration projects\u2014and India, from which Sri Lanka has nevertheless accepted a US$400 million swap facility<\/a> that contributed markedly to Sri Lanka\u2019s foreign reserves.<\/p>\n

In this context, middle powers like Australia\u2014which partnered with the World Health Organization to commit<\/a> A$600,000 to Sri Lanka\u2019s Covid-19 response\u2014would do well to continue to support MDBs and other multilateral initiatives. Australia should likewise continue to back multilateral institutions like the Indian Ocean Rim Association that help to maintain a rules-based, peaceful Indian Ocean<\/a>\u2014an objective that Sri Lankan policymakers know<\/a> is indispensable to the country\u2019s future and will require the cooperation of many nations beyond China.<\/p>\n

China has established itself as an enduring partner of Sri Lanka. During the Cold War, Sri Lanka turned alternately to the West and the Soviet Union, depending on its leaders in power. There is little such local vacillation in the \u2018new cold war\u2019 between the US and China; even the presumed pro-Western government between 2015 and 2019 relied heavily on Chinese assistance.<\/p>\n

That China will solidify its partnership with Sri Lanka appears a given, but the extent to which it does so will depend on multiple factors that link Sri Lanka to its non-Chinese partners. International financial institutions have a key role to play in diversifying Sri Lanka\u2019s international partnerships and engagement, a role that that middle powers can also support in different ways.<\/p>\n

This post is part of an ASPI research project on the vulnerability of Indo-Pacific island states<\/a> in the age of Covid-19 being undertaken with the support of the Embassy of Japan in Australia.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

After the outbreak of Covid-19 earlier this year, some predicted that the pandemic\u2019s economic reverberations in Sri Lanka would lead China to increase its already considerable funding to the island state. 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