[caption id="attachment_87998" align="alignleft" width="300"]
US President Donald Trump, Indian PM Narendra Modi and Chinese President Xi Jinping[/caption]
By Madhusha Thavapalakumar
Sri Lanka’s systemic weaknesses and a history of failed policies have made its unhealthy reliance on world powers inevitable. Any plans for self-sufficiency can only be for the long run, due to Sri Lanka’s import dependence. Therefore, it makes no sense to ask the question whether Sri Lanka should rely on other countries or not, but rather which countries it should rely on, especially following the impact of the Covid-19 pandemic that shook the world.
Economic diplomacy of Sri Lanka
Sri Lanka has been engaged in extensive diplomatic contact with other countries following Independence in 1948, with India and China securing prominent places in that list.
The other important countries include the United States of America (US), Singapore, Japan, Thailand, Bangladesh, Pakistan, South Korea, and the European Union (EU). Sri Lanka seems to have developed close economic ties with some of these countries, even though it is committed to follow a non-aligned policy.
China and Sri Lanka
China is undoubtedly one of those close allies. Sri Lanka’s ties with China were renewed back in 1957, and were strengthened more recently in 2009 after the civil war, owing to western countries being increasingly critical and complaining over how Sri Lanka handled the war.
Following Prime Minister Sirimavo Bandaranaike’s visit to China in 1957, both countries entered into the Economic and Technical Co-operation Agreement that same year. Through this agreement, Sri Lanka received financial assistance to construct the Bandaranaike Memorial International Conference Hall (BMICH).
The Sri Lanka-China Joint Commission was formed in 1991 which extended loan facilities for various developments in Sri Lanka, and the Sri Lanka-China Business Co-operation Council (SLCBCC) was established in 1994 to further improve trade and investment relations between the two countries.
China further enhanced its bilateral relations with Sri Lanka under the Government headed by current Prime Minister Mahinda Rajapaksa. There were several high-level visits under Rajapaksa’s regime which continued even during the Government led by former President Maithripala Sirisena. During these two regimes, China extended financial assistance for a number of infrastructure projects in Sri Lanka, including the Hambantota Port, Mattala Rajapaksa International Airport, Moragahakanda Multipurpose Development Project, Colombo-Katunayake Expressway, and many more.
Current reliance on China: Big debt and leased port
Substantial financial assistance obtained from China led by Sri Lanka’s increased financial dependence on them, has resulted in a massive pile of debt for our country; the most recent loan obtained from China is just weeks old.
After the spread of Covid-19 in Sri Lanka, and the destruction caused to the economy due to it, the Government decided to borrow another $ 500 million from the Chinese Government, which was followed with a decision to borrow $ 80 million more from the China Development Bank to improve roads. It is not only to the Government of China that Sri Lanka owes money, but also the EXIM (Export-Import) Bank of China.
As of November last year, China’s share in Sri Lanka’s total external debt was 9% as estimated by the Central Bank of Sri Lanka (CBSL), whereas a report by the International Monetary Fund (IMF) states that as of November 2019, Sri Lanka owed about 15% of its external debt to China.
The most notable project financed by China in Sri Lanka was the Port in Hambantota, known as the Magampura Mahinda Rajapaksa Port, that was built utilising Chinese financial assistance to the tune of $ 1.5 billion.
The port that was opened for operations in November 2010 is said to be the second largest port in Sri Lanka. However, it wasn’t fruitful for the Government as the port made an operating profit of just $ 1.8 million in 2016, even after six years of operation.
This made Sri Lanka’s debt repayments to China extremely difficult to fulfil. As such, in July 2017, then Prime Minister Ranil Wickremasinghe signed a 99-year lease agreement with China Merchant Port Holdings for $ 1.12 billion. It is notable that this amount is lower than the sum obtained from China for the construction of the port, and the money was not used to repay the loan but rather for some short-term external financing. President Gotabaya Rajapaksa, who was elected in November last year, intends to renegotiate this agreement.
Does China's future look promising?
[caption id="attachment_88000" align="alignright" width="300"]
Xi Jinping[/caption]
Weeks prior to the Covid-19 pandemic outbreak in China, US Senator of Utah Mitt Romney stated that China is mostly likely to become the sole global superpower by mid-century due to its “comprehensive and rigorous strategy to achieve global domination”.
Before Covid-19, China was an economic powerhouse, being a major consumer and producer of goods and services. In the last two decades, China saw an average economic growth of around 9% each year.
However, the pandemic which originated in China forced the country to suffer its worst economic contraction since the 1970s; the economy shrank by 6.8% in the first three months of this year, compared to the size of the economy during the same period last year. China’s retail sales plummeted by 15% in March this year, while unemployment reached almost 6% that month. The pandemic, in tandem with its internal issues, was a severe blow to China's economy.
Last year, the National People’s Congress of China introduced a draft to put in place laws and enforcement measures in Hong Kong to safeguard national security, outlawing any act of secession, subversion, or foreign interference, and this triggered riots.
Protests that began in Hong Kong spread around the world, especially to campuses in Canada and New Zealand, but tensions of riots that spread in Taiwan were much higher, given its unique history as a self-governed island that China claims as its own. These riots portrayed the aggressive side of China to other countries.
As The Diplomat notes, in response to those protests, the US Congress passed the Hong Kong Human Rights and Democracy Act, threatening sanctions against China and tying US economic relations to Hong Kong with its continued high degree of autonomy.
Given the pandemic, domestic conflicts, and international sanctions, China’s economic outlook is facing significant challenges which are in dire need to get sorted. On 22 May, this year, China announced the removal of its traditional annual economic growth target at the opening of the National People’s Congress.
Amidst this, the Chinese Government unveiled a larger fiscal deficit target for this year and off-budget measures to shore up economic growth and support employment. According to analysts, the size of the total fiscal stimulus will amount to around 7% of Gross Domestic Product (GDP).
Nevertheless, China has been announcing assistance including donations of healthcare supplies for countries even after the Covid-19 outbreak, and predicts a quick recovery of their economy.
Former CBSL Monetary Policy Consultative Committee Chairman Sirimal Abeyratne had recently told Nikkei Asian Review that if the Sri Lankan Government is turning to China for further financial assistance, there might be good reasons for that as well, because China is now in a better position to help as it has already brought Covid-19 under control and borrowing might be quicker under favourable conditions.
In terms of trade, during the peak of Covid-19, the Sri Lankan export sector was suffering due to the inability to secure raw material from China, the biggest raw material importer to Sri Lanka, as Chinese factories were closed for over two months to mitigate the spread of the virus. Sri Lanka had no option but to look for other import markets and slash its export targets for the year 2020, according to the local export industry.
India and Sri Lanka
Sri Lanka’s ties with India, its closest neighbour, span over 2,500 years. India developed closer relations with Sri Lanka during the final stage of Sri Lanka’s civil war, as India supported the Sri Lankan Government’s right to act against terrorist forces. Sri Lanka has long been a priority destination for direct investment from India and is one of India’s largest trading partners in the South Asian Association of Regional Co-operation (SAARC).
The India-Sri Lanka Free Trade Agreement of March 2000 helped bilateral trade between the two countries grow rapidly. As Sri Lanka Customs data reports, bilateral trade in 2018 amounted to $ 4.93 billion. Exports from India to Sri Lanka amounted as $ 4.16 billion while exports from Sri Lanka to India amounted to $ 767 million.
In the past decade, several Sri Lankan companies including Brandix, MAS Holdings, John Keells Holdings, and Aitken Spence entered the Indian market.
Sri Lanka is also among the major recipients of development assistance from the Indian Government. According to Sri Lanka’s Ministry of Foreign Affairs, India’s overall commitment to Sri Lanka stands close to $ 3 billion, out of which around $ 560 million is purely in grants. The most notable projects by India in Sri Lanka are the 1990 Emergency Ambulance Service and passenger coaches for Sri Lanka’s Railway Department.
More recent investment projects by India in Sri Lanka comprise the joint venture project of the Eastern Container Terminal (ECT) at the Colombo Port and a tripartite LNG (liquefied natural gas) plant that was signed under the previous Government.
Indian Prime Minister Narendra Modi has the closest diplomatic relations with Sri Lanka than any other Government. This, as economists say, is to ensure that India has more influence on Sri Lanka than China, the latter of which has been financially assisting Sri Lanka in many notable infrastructure projects as part of its Belt and Road Initiative (BRI).
Soon after Sri Lanka's presidential election in November 2019, Modi announced a $ 400 million loan to Sri Lanka for infrastructure projects. Meanwhile, even before the local spread of Covid-19, Prime Minister Mahinda Rajapaksa, during an official visit to India, requested from Modi a three-year moratorium on loan payments.
In 2020 alone, Sri Lanka’s debt servicing amounts to $ 5 billion.
President Trump and Indian PM Narendra Modi[/caption]
Even though ties between Sri Lanka and India are almost unbreakable, given the impact of the pandemic in India, their ability to help or engage in trade might come into question in the short or medium term.
India’s economy might not be performing as smoothly the US or Chinese economies after recovery from the pandemic. India’s economy took a massive hit following the over two months in lockdown as the unemployment rate shot up to a dramatic 26% in April from 6.7% in mid-March this year. A May Bloomberg survey of economists estimates GDP contraction of 1.9% in the current fiscal year while the Bank of India predicts economic growth to contract by over 40% in the first quarter of 2021.
Before the lockdown, India’s gross savings rate dropped to 30% in 2019, the lowest in over a decade, as companies and the Government splurged. However, Indian economist Pranjul Bhandari stated that a rise in savings during the lockdown period could help India curtail its current account deficits.
Even though India was constantly seen helping other countries, particularly during the pandemic as the country was sending humanitarian aid in the form of pharmaceuticals, it is still unclear whether India could afford to keep financially assisting countries like it did before the pandemic.
However, on a positive note, the country is a new home for Japanese companies and factories that have been evacuating China following the Japanese Government’s directive to do so. This is expected to bring significant foreign direct investment (FDI) into India.
In terms of trade, according to local exporters, they are receiving new orders from the country as business is returning to normal in India, one of the top export markets of Sri Lanka.
US and Sri Lanka
The US and Sri Lanka have a very favourable relationship, especially in terms of promoting economic co-operation and exchanges in maritime security and safety. According to the American Embassy in Sri Lanka, US assistance to Sri Lanka totalled more than $ 2 billion since Sri Lanka’s Independence in 1948 and the US has made substantial investments in Sri Lanka since as well. Following the April 2019 Easter attacks, the US sent FBI (Federal Bureau of Investigation) experts to support the investigation.
The US and Sri Lanka were also discussing a $ 480 million Millennium Challenge Corporation (MCC) compact supporting Sri Lanka’s economic development which is yet to be signed by the Sri Lankan Government.
The US is Sri Lanka’s largest export market and accounts for nearly $ 3 billion of the $ 11.7 billion in goods Sri Lanka exports annually. US goods imports from Sri Lanka totalled $2.7 billion in 2018, down 6.4% from 2017. US exports to Sri Lanka in 2018 were valued at $ 372 million, up 10.7% from the previous year. Exports from Sri Lanka to the US mostly comprise apparel, but also include rubber, industrial supplies, gemstones, tea, and spices.
In addition, Sri Lanka is a strategically important country for the US, given its unique geographical location in the Indian Ocean and that the natural harbour in Trincomalee is one of a kind. The Status of Forces Agreement (SOFA) with the US is a perfect example of the US’s interest.
According to The Diplomat, a section of Sri Lankan analysts believe that should the US lose its naval base in Diego Garcia, it will require an alternative base, which could be Sri Lanka.
Is the U.S. reliable amidst its domestic issues?
The US is the worst affected by the ongoing pandemic in terms of the number of confirmed cases which runs into the millions and virus-related deaths into the hundred thousands. The US economy is facing its worst economic contraction in over a decade. According to the Federal Reserve Bank, the US economy is expected to shrink by 42.8% from April through June.
According to the US Congressional Budget Office, the virus will adversely impact the economy through much of the next decade, cutting some $ 8 trillion from GDP over that period. The number of people making initial filings for unemployment insurance surged to 3.3 million in mid-April, then 6.6 million in late April.
American financial columnists Pam Martens and Russ Martens stated that the first death in China was reported on 11 January 2020, but the signs of an economic meltdown started on 17 September 2019. In fact, the Federal Reserve gave primary dealers a whopping $ 6.6 trillion before the first death from Covid-19 was reported in America.
"By the end of January 2020, the Fed’s balance and repo market spreadsheets had indicated the Central Bank injected $ 6.6 trillion to private institutions and there were no US coronavirus deaths at this time," Martens stated.
[caption id="attachment_60803" align="alignright" width="300"]
Donald Trump[/caption]
While the US economy is suffering like this, the death of an unarmed Black man as a result of a police officer holding a knee on his neck for over eight minutes in Minneapolis, has caused mass protests across many cities in America, raising more domestic issues for the Government to deal with. Protests have been continuously going on for over a week. This is expected to delay the US’s Covid-19 recovery, making it more difficult.
Meanwhile, major Wall Street banks are expecting US GDP to plunge by more than 30% during the second quarter.
According to reports on US’s economic outlook, the number of unemployed will rise to 26 million in the near term while GDP growth is expected to be 1.9% in 2021 and 1.8% in 2022. However, it is likely that the US will continue providing assistance for countries, as they are yet to make any announcements on cutting aid.
Meanwhile, in terms of trade, US imports fell by 13.7% in April compared to March this year. Nevertheless, according to Naroff Economic Advisors, imports are expected to pick up sooner than exports and this is expected to give some hope to Sri Lankan exporters.
How much leverage do these three have over each other?
Being in the same region as China, India always ensures its competitiveness, at the very least especially in the case of Sri Lankan affairs. Even though India and China currently face a Himalayan border dispute, both countries try their best to not to create conflict.
Nevertheless, with regard to the Himalayan border issue, tensions escalated in the recent weeks, which led soldiers from either side facing off just a few hundred metres from each other. Considering the bitter relationship they have with China, the US has come to the rescue of India. The US has also held China responsible for creating the border issue in the first place and stated that China is being aggressive here.
The US and China, an economic superpower and a “wannabe” economic superpower, respectively, have been in conflict over the past years and sanctions have been the result. Tension heightened with the outbreak of the pandemic in Europe, and American President Donald Trump was furious over China for hiding the true number of cases pertaining to the pandemic and supressing information relating to same at its outset.
Meanwhile, according to the BBC, China’s watching the recent protests led by Floyd’s death in the US with particular interest. This is because Washington was supporting last year's Hong Kong pro-democracy demonstrations. In fact, Chinese state media had extensively covered the protests showcasing the instability in the US.
Nevertheless, several US economists are of the view that the US needs China more than China needs them. China is an export-oriented economy and the US is its biggest export market, even though it has been declining over the past few years. The constant sanctions imposed on China by the US, as global economists reported, can be endured by China, but the US depends heavily on China for providing low-cost goods, and the US also depends on China to support its own exports.
American analysts note that the US depends on China to provide funding for its budget deficits. It is the largest foreign holder of US Treasury securities and America depends on China because of a fundamental weakness in the structure of the US economy.
Chinese debt in the US amounted to $ 1.08 trillion in March 2020.
“President Donald Trump continues to single out China as the villain in the great American tragedy, when in fact he should take a careful look in the mirror,” a Bloomberg article reported early this year.
However, another set of US economists are of a contrary view as they say that China would need the US as opposed to the other way around, owing to the potential of the US sanctions on China to cause millions of losses in jobs.
The big question mark
Amongst these three countries, the US and China are bigger economies than India. Even though India officially claims that it follows a non-aligned policy, it has been closer to the US than China.
China, which has mostly been aggressive as news reports say, does not have powerful allies as most European countries and India are closer with the US than they are with China. Analysts state that as far as European countries are concerned, they tend to back the US rather than China due to possibilities of getting sanctions imposed on them if they opt for China over the US.
However, according to the World Bank’s International Comparison Programme, China’s total real income is larger than that of the US, and in terms of purchasing power parity, China’s 2017 GDP was $ 19.61 trillion whereas the US’s was $ 19.5 billion.
As far as future outlook of these economies is concerned, Deutsche Bank’s Chief Economist and Head of Research for Asia Pacific Michael Spencer stated that China’s economy is recovering at an impressive pace and the country’s exports have also been better than expected.
According to Spencer, the US’s plans to open up the economy too soon might trigger a second wave of the pandemic which might result in the US economy struggling more.
However, on a positive note, the US stock market, an ideal reflection of the actual economy, has been positive in the recent days despite internal tensions. The S&P 500 closed last Tuesday (9) at the highest level in nearly three months. Nevertheless, several American think tanks are of the view that the US would take years to recover from the enormous damage Covid-19 has caused its economy.
As far as Sri Lanka is concerned, no matter which country it chooses to align itself with over the next few months, it is imperative that the relationship is mutually beneficial and not a one-sided arrangement that could be detrimental to the Sri Lankan economy.
US President Donald Trump, Indian PM Narendra Modi and Chinese President Xi Jinping[/caption]
By Madhusha Thavapalakumar
Sri Lanka’s systemic weaknesses and a history of failed policies have made its unhealthy reliance on world powers inevitable. Any plans for self-sufficiency can only be for the long run, due to Sri Lanka’s import dependence. Therefore, it makes no sense to ask the question whether Sri Lanka should rely on other countries or not, but rather which countries it should rely on, especially following the impact of the Covid-19 pandemic that shook the world.
Economic diplomacy of Sri Lanka
Sri Lanka has been engaged in extensive diplomatic contact with other countries following Independence in 1948, with India and China securing prominent places in that list.
The other important countries include the United States of America (US), Singapore, Japan, Thailand, Bangladesh, Pakistan, South Korea, and the European Union (EU). Sri Lanka seems to have developed close economic ties with some of these countries, even though it is committed to follow a non-aligned policy.
China and Sri Lanka
China is undoubtedly one of those close allies. Sri Lanka’s ties with China were renewed back in 1957, and were strengthened more recently in 2009 after the civil war, owing to western countries being increasingly critical and complaining over how Sri Lanka handled the war.
Following Prime Minister Sirimavo Bandaranaike’s visit to China in 1957, both countries entered into the Economic and Technical Co-operation Agreement that same year. Through this agreement, Sri Lanka received financial assistance to construct the Bandaranaike Memorial International Conference Hall (BMICH).
The Sri Lanka-China Joint Commission was formed in 1991 which extended loan facilities for various developments in Sri Lanka, and the Sri Lanka-China Business Co-operation Council (SLCBCC) was established in 1994 to further improve trade and investment relations between the two countries.
China further enhanced its bilateral relations with Sri Lanka under the Government headed by current Prime Minister Mahinda Rajapaksa. There were several high-level visits under Rajapaksa’s regime which continued even during the Government led by former President Maithripala Sirisena. During these two regimes, China extended financial assistance for a number of infrastructure projects in Sri Lanka, including the Hambantota Port, Mattala Rajapaksa International Airport, Moragahakanda Multipurpose Development Project, Colombo-Katunayake Expressway, and many more.
Current reliance on China: Big debt and leased port
Substantial financial assistance obtained from China led by Sri Lanka’s increased financial dependence on them, has resulted in a massive pile of debt for our country; the most recent loan obtained from China is just weeks old.
After the spread of Covid-19 in Sri Lanka, and the destruction caused to the economy due to it, the Government decided to borrow another $ 500 million from the Chinese Government, which was followed with a decision to borrow $ 80 million more from the China Development Bank to improve roads. It is not only to the Government of China that Sri Lanka owes money, but also the EXIM (Export-Import) Bank of China.
As of November last year, China’s share in Sri Lanka’s total external debt was 9% as estimated by the Central Bank of Sri Lanka (CBSL), whereas a report by the International Monetary Fund (IMF) states that as of November 2019, Sri Lanka owed about 15% of its external debt to China.
The most notable project financed by China in Sri Lanka was the Port in Hambantota, known as the Magampura Mahinda Rajapaksa Port, that was built utilising Chinese financial assistance to the tune of $ 1.5 billion.
The port that was opened for operations in November 2010 is said to be the second largest port in Sri Lanka. However, it wasn’t fruitful for the Government as the port made an operating profit of just $ 1.8 million in 2016, even after six years of operation.
This made Sri Lanka’s debt repayments to China extremely difficult to fulfil. As such, in July 2017, then Prime Minister Ranil Wickremasinghe signed a 99-year lease agreement with China Merchant Port Holdings for $ 1.12 billion. It is notable that this amount is lower than the sum obtained from China for the construction of the port, and the money was not used to repay the loan but rather for some short-term external financing. President Gotabaya Rajapaksa, who was elected in November last year, intends to renegotiate this agreement.
Does China's future look promising?
[caption id="attachment_88000" align="alignright" width="300"] Xi Jinping[/caption]
Weeks prior to the Covid-19 pandemic outbreak in China, US Senator of Utah Mitt Romney stated that China is mostly likely to become the sole global superpower by mid-century due to its “comprehensive and rigorous strategy to achieve global domination”.
Before Covid-19, China was an economic powerhouse, being a major consumer and producer of goods and services. In the last two decades, China saw an average economic growth of around 9% each year.
However, the pandemic which originated in China forced the country to suffer its worst economic contraction since the 1970s; the economy shrank by 6.8% in the first three months of this year, compared to the size of the economy during the same period last year. China’s retail sales plummeted by 15% in March this year, while unemployment reached almost 6% that month. The pandemic, in tandem with its internal issues, was a severe blow to China's economy.
Last year, the National People’s Congress of China introduced a draft to put in place laws and enforcement measures in Hong Kong to safeguard national security, outlawing any act of secession, subversion, or foreign interference, and this triggered riots.
Protests that began in Hong Kong spread around the world, especially to campuses in Canada and New Zealand, but tensions of riots that spread in Taiwan were much higher, given its unique history as a self-governed island that China claims as its own. These riots portrayed the aggressive side of China to other countries.
As The Diplomat notes, in response to those protests, the US Congress passed the Hong Kong Human Rights and Democracy Act, threatening sanctions against China and tying US economic relations to Hong Kong with its continued high degree of autonomy.
Given the pandemic, domestic conflicts, and international sanctions, China’s economic outlook is facing significant challenges which are in dire need to get sorted. On 22 May, this year, China announced the removal of its traditional annual economic growth target at the opening of the National People’s Congress.
Amidst this, the Chinese Government unveiled a larger fiscal deficit target for this year and off-budget measures to shore up economic growth and support employment. According to analysts, the size of the total fiscal stimulus will amount to around 7% of Gross Domestic Product (GDP).
Nevertheless, China has been announcing assistance including donations of healthcare supplies for countries even after the Covid-19 outbreak, and predicts a quick recovery of their economy.
Former CBSL Monetary Policy Consultative Committee Chairman Sirimal Abeyratne had recently told Nikkei Asian Review that if the Sri Lankan Government is turning to China for further financial assistance, there might be good reasons for that as well, because China is now in a better position to help as it has already brought Covid-19 under control and borrowing might be quicker under favourable conditions.
In terms of trade, during the peak of Covid-19, the Sri Lankan export sector was suffering due to the inability to secure raw material from China, the biggest raw material importer to Sri Lanka, as Chinese factories were closed for over two months to mitigate the spread of the virus. Sri Lanka had no option but to look for other import markets and slash its export targets for the year 2020, according to the local export industry.
India and Sri Lanka
Sri Lanka’s ties with India, its closest neighbour, span over 2,500 years. India developed closer relations with Sri Lanka during the final stage of Sri Lanka’s civil war, as India supported the Sri Lankan Government’s right to act against terrorist forces. Sri Lanka has long been a priority destination for direct investment from India and is one of India’s largest trading partners in the South Asian Association of Regional Co-operation (SAARC).
The India-Sri Lanka Free Trade Agreement of March 2000 helped bilateral trade between the two countries grow rapidly. As Sri Lanka Customs data reports, bilateral trade in 2018 amounted to $ 4.93 billion. Exports from India to Sri Lanka amounted as $ 4.16 billion while exports from Sri Lanka to India amounted to $ 767 million.
In the past decade, several Sri Lankan companies including Brandix, MAS Holdings, John Keells Holdings, and Aitken Spence entered the Indian market.
Sri Lanka is also among the major recipients of development assistance from the Indian Government. According to Sri Lanka’s Ministry of Foreign Affairs, India’s overall commitment to Sri Lanka stands close to $ 3 billion, out of which around $ 560 million is purely in grants. The most notable projects by India in Sri Lanka are the 1990 Emergency Ambulance Service and passenger coaches for Sri Lanka’s Railway Department.
More recent investment projects by India in Sri Lanka comprise the joint venture project of the Eastern Container Terminal (ECT) at the Colombo Port and a tripartite LNG (liquefied natural gas) plant that was signed under the previous Government.
Indian Prime Minister Narendra Modi has the closest diplomatic relations with Sri Lanka than any other Government. This, as economists say, is to ensure that India has more influence on Sri Lanka than China, the latter of which has been financially assisting Sri Lanka in many notable infrastructure projects as part of its Belt and Road Initiative (BRI).
Soon after Sri Lanka's presidential election in November 2019, Modi announced a $ 400 million loan to Sri Lanka for infrastructure projects. Meanwhile, even before the local spread of Covid-19, Prime Minister Mahinda Rajapaksa, during an official visit to India, requested from Modi a three-year moratorium on loan payments.
In 2020 alone, Sri Lanka’s debt servicing amounts to $ 5 billion.
Can we rely on India even after Covid-19?
[caption id="attachment_87999" align="alignleft" width="300"] President Trump and Indian PM Narendra Modi[/caption]
Even though ties between Sri Lanka and India are almost unbreakable, given the impact of the pandemic in India, their ability to help or engage in trade might come into question in the short or medium term.
India’s economy might not be performing as smoothly the US or Chinese economies after recovery from the pandemic. India’s economy took a massive hit following the over two months in lockdown as the unemployment rate shot up to a dramatic 26% in April from 6.7% in mid-March this year. A May Bloomberg survey of economists estimates GDP contraction of 1.9% in the current fiscal year while the Bank of India predicts economic growth to contract by over 40% in the first quarter of 2021.
Before the lockdown, India’s gross savings rate dropped to 30% in 2019, the lowest in over a decade, as companies and the Government splurged. However, Indian economist Pranjul Bhandari stated that a rise in savings during the lockdown period could help India curtail its current account deficits.
Even though India was constantly seen helping other countries, particularly during the pandemic as the country was sending humanitarian aid in the form of pharmaceuticals, it is still unclear whether India could afford to keep financially assisting countries like it did before the pandemic.
However, on a positive note, the country is a new home for Japanese companies and factories that have been evacuating China following the Japanese Government’s directive to do so. This is expected to bring significant foreign direct investment (FDI) into India.
In terms of trade, according to local exporters, they are receiving new orders from the country as business is returning to normal in India, one of the top export markets of Sri Lanka.
US and Sri Lanka
The US and Sri Lanka have a very favourable relationship, especially in terms of promoting economic co-operation and exchanges in maritime security and safety. According to the American Embassy in Sri Lanka, US assistance to Sri Lanka totalled more than $ 2 billion since Sri Lanka’s Independence in 1948 and the US has made substantial investments in Sri Lanka since as well. Following the April 2019 Easter attacks, the US sent FBI (Federal Bureau of Investigation) experts to support the investigation.
The US and Sri Lanka were also discussing a $ 480 million Millennium Challenge Corporation (MCC) compact supporting Sri Lanka’s economic development which is yet to be signed by the Sri Lankan Government.
The US is Sri Lanka’s largest export market and accounts for nearly $ 3 billion of the $ 11.7 billion in goods Sri Lanka exports annually. US goods imports from Sri Lanka totalled $2.7 billion in 2018, down 6.4% from 2017. US exports to Sri Lanka in 2018 were valued at $ 372 million, up 10.7% from the previous year. Exports from Sri Lanka to the US mostly comprise apparel, but also include rubber, industrial supplies, gemstones, tea, and spices.
In addition, Sri Lanka is a strategically important country for the US, given its unique geographical location in the Indian Ocean and that the natural harbour in Trincomalee is one of a kind. The Status of Forces Agreement (SOFA) with the US is a perfect example of the US’s interest.
According to The Diplomat, a section of Sri Lankan analysts believe that should the US lose its naval base in Diego Garcia, it will require an alternative base, which could be Sri Lanka.
Is the U.S. reliable amidst its domestic issues?
The US is the worst affected by the ongoing pandemic in terms of the number of confirmed cases which runs into the millions and virus-related deaths into the hundred thousands. The US economy is facing its worst economic contraction in over a decade. According to the Federal Reserve Bank, the US economy is expected to shrink by 42.8% from April through June.
According to the US Congressional Budget Office, the virus will adversely impact the economy through much of the next decade, cutting some $ 8 trillion from GDP over that period. The number of people making initial filings for unemployment insurance surged to 3.3 million in mid-April, then 6.6 million in late April.
American financial columnists Pam Martens and Russ Martens stated that the first death in China was reported on 11 January 2020, but the signs of an economic meltdown started on 17 September 2019. In fact, the Federal Reserve gave primary dealers a whopping $ 6.6 trillion before the first death from Covid-19 was reported in America.
"By the end of January 2020, the Fed’s balance and repo market spreadsheets had indicated the Central Bank injected $ 6.6 trillion to private institutions and there were no US coronavirus deaths at this time," Martens stated.
[caption id="attachment_60803" align="alignright" width="300"] Donald Trump[/caption]
While the US economy is suffering like this, the death of an unarmed Black man as a result of a police officer holding a knee on his neck for over eight minutes in Minneapolis, has caused mass protests across many cities in America, raising more domestic issues for the Government to deal with. Protests have been continuously going on for over a week. This is expected to delay the US’s Covid-19 recovery, making it more difficult.
Meanwhile, major Wall Street banks are expecting US GDP to plunge by more than 30% during the second quarter.
According to reports on US’s economic outlook, the number of unemployed will rise to 26 million in the near term while GDP growth is expected to be 1.9% in 2021 and 1.8% in 2022. However, it is likely that the US will continue providing assistance for countries, as they are yet to make any announcements on cutting aid.
Meanwhile, in terms of trade, US imports fell by 13.7% in April compared to March this year. Nevertheless, according to Naroff Economic Advisors, imports are expected to pick up sooner than exports and this is expected to give some hope to Sri Lankan exporters.
How much leverage do these three have over each other?
Being in the same region as China, India always ensures its competitiveness, at the very least especially in the case of Sri Lankan affairs. Even though India and China currently face a Himalayan border dispute, both countries try their best to not to create conflict.
Nevertheless, with regard to the Himalayan border issue, tensions escalated in the recent weeks, which led soldiers from either side facing off just a few hundred metres from each other. Considering the bitter relationship they have with China, the US has come to the rescue of India. The US has also held China responsible for creating the border issue in the first place and stated that China is being aggressive here.
The US and China, an economic superpower and a “wannabe” economic superpower, respectively, have been in conflict over the past years and sanctions have been the result. Tension heightened with the outbreak of the pandemic in Europe, and American President Donald Trump was furious over China for hiding the true number of cases pertaining to the pandemic and supressing information relating to same at its outset.
Meanwhile, according to the BBC, China’s watching the recent protests led by Floyd’s death in the US with particular interest. This is because Washington was supporting last year's Hong Kong pro-democracy demonstrations. In fact, Chinese state media had extensively covered the protests showcasing the instability in the US.
Nevertheless, several US economists are of the view that the US needs China more than China needs them. China is an export-oriented economy and the US is its biggest export market, even though it has been declining over the past few years. The constant sanctions imposed on China by the US, as global economists reported, can be endured by China, but the US depends heavily on China for providing low-cost goods, and the US also depends on China to support its own exports.
American analysts note that the US depends on China to provide funding for its budget deficits. It is the largest foreign holder of US Treasury securities and America depends on China because of a fundamental weakness in the structure of the US economy.
Chinese debt in the US amounted to $ 1.08 trillion in March 2020.
“President Donald Trump continues to single out China as the villain in the great American tragedy, when in fact he should take a careful look in the mirror,” a Bloomberg article reported early this year.
However, another set of US economists are of a contrary view as they say that China would need the US as opposed to the other way around, owing to the potential of the US sanctions on China to cause millions of losses in jobs.
The big question mark
Amongst these three countries, the US and China are bigger economies than India. Even though India officially claims that it follows a non-aligned policy, it has been closer to the US than China.
China, which has mostly been aggressive as news reports say, does not have powerful allies as most European countries and India are closer with the US than they are with China. Analysts state that as far as European countries are concerned, they tend to back the US rather than China due to possibilities of getting sanctions imposed on them if they opt for China over the US.
However, according to the World Bank’s International Comparison Programme, China’s total real income is larger than that of the US, and in terms of purchasing power parity, China’s 2017 GDP was $ 19.61 trillion whereas the US’s was $ 19.5 billion.
As far as future outlook of these economies is concerned, Deutsche Bank’s Chief Economist and Head of Research for Asia Pacific Michael Spencer stated that China’s economy is recovering at an impressive pace and the country’s exports have also been better than expected.
According to Spencer, the US’s plans to open up the economy too soon might trigger a second wave of the pandemic which might result in the US economy struggling more.
However, on a positive note, the US stock market, an ideal reflection of the actual economy, has been positive in the recent days despite internal tensions. The S&P 500 closed last Tuesday (9) at the highest level in nearly three months. Nevertheless, several American think tanks are of the view that the US would take years to recover from the enormous damage Covid-19 has caused its economy.
As far as Sri Lanka is concerned, no matter which country it chooses to align itself with over the next few months, it is imperative that the relationship is mutually beneficial and not a one-sided arrangement that could be detrimental to the Sri Lankan economy.