The Sri Lankan President Ranil Wickremesinghe is currently on his first-ever visit to China since he assumed office as President Sri Lanka in July 2022.

Expectations are high in Sri Lanka as China has promised debt relief measures though without revealing any details.

Geopolitically interested external forces India and the US are watching the proceedings with anxiety as Sri Lanka and China appear to be bridging the gulf created by Colombo’s decision to default on loan repayment and approach India and the IMF for relief, by-passing China, the single largest bilateral creditor.

Much is expected from the visit, though it is not a State Visit. Officially, the Lankan President is to participate in the third Belt and Road Forum for International Cooperation that is to take place in Beijing on October 17 and 18.

Nevertheless, the visit is taking place in an important economic and geopolitical context. Sri Lanka badly needs debt relief from China to pull itself out of the financial woods. It also has to balance its responses to geopolitical pressures from rivals India and China.

Debt Issue

To take the bread and butter issues first: In November 2022, Sri Lanka owed Chinese lenders US$ 7.4 billion – nearly a fifth of its public external debt, according to calculations by the China Africa Research Initiative (CARI).

But despite fervent appeals from Sri Lanka since the beginning of the foreign exchange crunch in 2021, China did not join the international effort to help Sri Lanka by giving financial assurances and offering to take a haircut. China plainly said that it did not believe in this kind of relief and asked Sri Lanka to put its messy financial house in order. It offered further credit and a buyer’s credit totalling about US$ 2 billion instead of giving debt relief.

But other international creditors wanted China to take a haircut in line with them. They would not allow a separate Sino-Lankan deal as that would not be fair.

While the tug of war was going on, China last week, on the eve of the visit of Wickremesinghe, announced that it had reached a ‘tentative’ agreement with Sri Lanka on debt restructuring. The announcement also came on the eve of the IMF/World Bank meeting in Morocco.

According to the Sri Lankan Finance Ministry, it had reached an agreement with the Export-Import Bank of China covering about US$4.2 billion of outstanding debt.

According to Reuters, the EXIM bank deal will help Sri Lanka get past the first review of an International Monetary Fund (IMF) program, and secure a second IMF tranche of about US$ 334 million.

Sri Lanka began negotiating with creditors including China, Japan and India last September parallel to moving forward on a US$ 2.9 billion IMF bailout.

Observers expect to get details of Sri Lanka’s deal with the EXIM Bank of China during the visit of the President to Beijing.

According to the former Sri Lankan Ambassador to China, Dr.Palitha Kohona, Wickremesinghe is also expected to swing deals to bring Chinese investments to the Chinese-built Colombo Port City, a US$ 1.4 billion project which is still to get any investments from anywhere.

Dr.Kohona said that the China Harbour Engineering Company, which built the Port City, will itself invest more than a billion dollars in it.  China is also expected to build the Central Highway linking Kandy with the north and south of the island.

Meanwhile, China’s flagship but controversial project, the Hambantota International Port (HIP), is beginning to look up. Recently it set a new record for oil and gas throughput. HIP has increased its bunker supplies nearly six times more than its 2022 volumes in the current year.

As of June 2023, the port completed over 500,000 metric tons of oil and gas throughput, successfully achieving the target set for the first half of the year, according to a company release.

MV Swarna Godavari from India, recently unloaded 31,500 metric tons of VLSFO in the port’s oil jetty. The total throughput was brought up to 520,000 metric tonnes, surpassing the milestone set by HIP’s Energy Services Department (ENS) and creating a brand new one.

The number was achieved through 143 vessel calls from January to June this year, as opposed to just 50 vessels that called during the corresponding period in 2022.

HIP’s bunkering partner is Sinopec Fuel Oil Lanka (SFOL).

China recently entered the fuel distribution market in Sri Lanka, joining the local Ceypetco and the Lankan Indian Oil Corporation. Australia’s United Petroleum and US-based RM Parks, in collaboration with Shell, are slated to join soon.

Sinopec has been granted a license to operate 150 service stations for 20 years in Sri Lanka, in addition to being able to invest in 50 new locations.

Geopolitical Scenario

In the geopolitical sphere, stiff competition between China and India is continuing and intensifying. India had taken the lead by giving Sri Lanka US$ 4.5 billion to tide over the financial, food and fuel crisis.

During the visit of President Wickremesinghe to New Delhi in July, agreements were signed on establishing grid connectivity between Madurai in India and Mannar in Sri Lanka. Other agreements were to build a road bridge across the Palk Strait and ply a passenger ferry between Nagapattinam in Tamil Nadu and Kankesanthurai in Jaffna. The first sailing took place last week.

India, Japan and Sri Lanka are expected to jointly develop the Trincomalee harbour and its hinterland to compete with the Chinese built and run Hambantota harbour.

The visits of Chinese survey vessels to Sri Lankan ports have raised the hackles of the security Establishments in New Delhi and Washington. Some vessels have already docked in Sri Lankan ports despite Indian objections.

The upcoming visit of the research vessel “Shi Yan 6” appears to be particularly problematic as the US too has raised a red flag. The Sri Lankans have been trying to evade criticism by saying that they are preparing a “Standard Operating Procedure” that would apply to all such controversial visits.

The Sri Lankan case is that the “Shi Yan 6” is a vessel that is slated to do joint oceanographic research in collaboration with the Sri Lankan National Aquatic Resources Research and Development Agency (NARA). The Oceanography department of Ruhuna University, which has a collaboration with a Chinese university, will also be involved in joint research. However, for India and the US, these vessels are “spy ships” that will use the data collected for strategic/military purposes.

“Shi Yan 6” is yet to arrive in Sri Lanka. It is expected to dock at the end of October if Colombo and New Delhi agree.

India and the US do not want any non-trade Chinese activity in the Sri Lankan seas or the Indian Ocean as a whole. Recently, the Indian Foreign Minister S.Jaishankar made this clear in his address to the Indian Ocean Rim Association Ministerial (IORA) meeting in Colombo. He portrayed India as the numero uno in the Indian Ocean.

He warned about Chinese machinations in the Indian Ocean Region when he said: “We should be clear where the dangers are, be it in hidden agendas, in unviable projects or in unsustainable debt.”

He urged “the exchange of experiences, sharing of best practices, greater awareness and deeper collaboration” between the 23 IORA members.

Sri Lanka is the current chair of the IORA and India is the Vice-Chair.