Sri Lanka foreign policy

What Has Been the Impact of IMF Bailout on Sri Lanka’s Foreign Policy?

For the last six months, major shifts have come about in Sri Lanka’s foreign policy in the face of the IMF bailout. The arrangement has pushed the government closer to the West and India, while maintaining its ties with China.

On March 20, the International Monetary Fund (IMF) announced its approval of an Extended Fund Facility to Sri Lanka.

The facility – which amounts to USD 2.9 billion in financial support, to be disbursed in tranches over the next four years – marks the 17th occasion the island nation has gone to the IMF for help. The Sri Lankan government expects the bailout and its attendant structural reforms to boost confidence in the country’s economy, and to unlock funding of up to USD 7 billion from other sources. The hope is that the IMF deal will revive the country’s economic prospects and encourage global capital markets and foreign investors who had fled the country to return.

Also read: Sri Lanka’s IMF Agreement Will Not Alter the Trajectory of a Collapsing Economy

Since last April, when Sri Lanka declared sovereign default, the country has gone through one crisis after another. The domestic dimensions of the crisis, including its economic aspects, have been widely covered, and there has been a flurry of debate over the exact economic reforms that should be enforced by the Sri Lankan government – now led by an unelected and deeply polarising president.

Anti-government protest in Sri Lanka on April 13, 2022 in front of the Presidential Secretariat. Photo: CC BY-SA 4.0

In comparison, there has been very little analysis of how the crisis has altered the island’s foreign policy, even though Sri Lanka has experienced massive shifts on this front in the last six months. These shifts have come about in the face of the IMF bailout, an arrangement that has pushed the government closer to the West and India, while maintaining its ties with China. Certain analysts, including local economists, have pointed out that the agreement with the IMF has become “an international issue”.

Friends and needs

These foreign policy shifts have their origins in last year’s economic crisis. In response to the country’s impending collapse, the Indian government dispatched more than USD 4 billion in aid. After June, when New Delhi discontinued a line of credit for fuel, the country’s return to the brink revealed Sri Lanka’s dependence on imports and the region’s de facto hegemon.

P.K. Balachandran, a foreign policy analyst based in Colombo, told this writer that Indian assistance, after New Delhi intervened in Sri Lanka’s negotiations with the IMF, did much to help the country stay afloat for several months, with credit lines for fuel and other assistance. According to Balachandran, the Indian government eventually faced a challenge in justifying to its own citizens the extent of its assistance to Sri Lanka, though it was still willing to provide aid.

Against that backdrop, Sri Lanka appears to be moving closer to its neighbour, as signified by the January visit to Colombo by S. Jaishankar, India’s minister of external affairs, as well as a flurry of visits and delegations from New Delhi last year and a controversial energy deal with the Adani Group.

At the same time, Sri Lanka has been keen to maintain its relationship with China. This has not always been easy, as the visit last year of a Chinese research vessel, the Yuan Wang 5, showed clearly. Yet on crucial issues like the One China policy – a policy the United States and the West, together with their allies, have been wavering on recently – the present government has taken definitive stands, with President Ranil Wickremesinghe reiterating Sri Lanka’s commitment to the policy.

Also read: Sri Lanka Grants Permission for Chinese Tracking Ship to Dock

On the other hand, certain government MPs have not been above depicting Beijing as a major hurdle to negotiations with the IMF. These include the foreign affairs minister, Ali Sabry, who referred to incompatibilities between China’s attitude to debt restructuring and “what the IMF wants” in an interview.

The relationship with Japan, a long-standing bilateral partner to Sri Lanka, has also been affected, primarily due to the controversy over the cancellation in 2020 of a proposed Light Rail Transit project in Colombo. The government of the time justified its cancellation of the project on the basis that it was “very costly” and not an “appropriate cost-effective transport solution”. While reports indicate that Japan will resume the project, especially in light of the IMF’s assurances, the way in which the deal was unilaterally shelved – without even a communique to relevant officials – is a stark reminder of how recklessly the Sri Lankan government at the time, led by Gotabaya Rajapaksa, conducted foreign policy.

The centrepiece of Japanese assistance to Sri Lanka is the work of the Japan International Cooperation Agency. Around a month ago, Prime Minister Dinesh Gunawardena urged the agency to resume its projects in the country, a dozen of which were put on hold in August last year owing to the economic crisis.

The present government’s moves on these projects reveal not just its desperation for foreign funding but also its newfound confidence in light of the IMF bailout and Japan’s involvement in Sri Lanka’s negotiations with the IMF. For its part, Japan has responded lukewarmly: while companies like Mitsubishi and Taisei have scaled back operations in Sri Lanka, citing the crisis, Japanese investors have expressed interest in returning to the country, according to the Sri Lanka Board of Investment.

Sri Lanka also seems to be eyeing closer cooperation with other East Asian countries, in particular South Korea, which in turn seems to be courting Sri Lanka. In late February, the country’s ministry of foreign affairs chose Sri Lanka as the first nation to host an overseas seminar on its Indo-Pacific strategy.

More than anything, however, Sri Lanka is closing in on some crucial, if controversial, agreements with India. Currently, Sri Lankan and Indian officials are trying to facilitate bilateral trade in Indian rupees and the government has advocated closer economic integration with its neighbour. In themselves, moves towards de-dollarisation are not unprecedented: India and Russia, to give one example, are trading in roubles. Yet, as a number of foreign policy commentators told this writer, the foreign minister’s recent remarks about currency integration, in particular his view that Sri Lanka should “integrate and probably allow Indian currency to be a tradeable currency”, suggest a wilful surrender of the country’s economic sovereignty.

Some of these commentators have derided the government’s lack of transparency on agreements with India’s Adani Group in the renewable energy sector, and its decision to sell state assets to foreign entities, including Indian companies. Interestingly, such moves towards economic liberalisation come even as recent polls suggest growing opposition to the privatisation of key sectors such as health and education, and more broadly, to capitalism as an economic and political system.

Moreover, following Gotabaya Rajapaksa’s volte-face on the IMF – after months of his government stating it would not go to the organisation, it did exactly that last April – the government, now led by Ranil Wickremesinghe, has been tilting somewhat to the West. While Sri Lanka has maintained neutrality on issues like the Russia-Ukraine war – over which various ambassadors and foreign governments have actively canvassed for the country’s support at the United Nations – its wholesale embrace of IMF reforms has won praise from the IMF itself.

Meanwhile, complicating matters further, the country has become increasingly vulnerable at a time when tensions between the US and China have ramped up to unprecedented levels. To give just one example, the US Indo-Pacific Command has asked for more than USD 15 billion to “stand up to the rapid military buildup of the People’s Liberation Army”.

Shifting to nowhere

In one sense, these foreign policy shifts have their antecedents in the 2015-2019 “good governance”, or yahapalanaya, government. That regime went to great lengths to emphasise a more inclusive foreign policy after the government that it ousted, under Mahinda Rajapasksa, had moved the country closer to China. It welcomed two prominent US officials, Nisha Biswal and John Kerry, and tried to achieve rapprochement with India.

Yet there was a discernible disconnect between its aims in this direction and its actual achievements, symbolised by the controversy over a billion-dollar agreement with China in 2017 for the construction of the Port City in Colombo. While local and foreign economists have written that this was not a predatory debt arrangement, other commentators have disagreed. Regardless, such developments only contributed to souring relations with India.

Also read: Sri Lanka’s Passage Into an Alley of Darkness – and Lessons for India

The 2019 election brought these contradictions to the fore. In the lead-up to the presidential elections, the Rajapaksas’ Sri Lanka Podujana Peramuna (SLPP) made use of public fears of foreign powers, specifically the United States, turning Sri Lanka into a military base. At the centre of this controversy was a USD 480 million grant from the Millennium Challenge Corporation, a US foreign assistance agency. The grant deal allegedly contained provisions that would have rendered US armed forces stationed in Sri Lanka immune from local laws.

Former Sri Lankan president Gotabaya Rajapaksa. Photo: Twitter/@GotabayaR.

Despite these fears, the government indicated that it was willing to go ahead with the deal, even though a section of the ruling party – Wickremesinghe’s United National Party (UNP) – promised to reassess it upon coming to power. Of course, the UNP lost those elections to the SLPP and Gotabaya Rajapaksa, whose victory was heralded by foreign policy commentators as the prelude to a shift to China again. However, as this writer argued a year ago, the Rajapaksa government’s foreign policy doctrines – from “India First” to “Kalyana Mitra” (Close Friendship) to “Neutral” – all advocated greater ties with New Delhi.

Indeed, it is notable that Narendra Modi was the first foreign official Rajapaksa invited to Sri Lanka after he assumed the country’s presidency. It is also notable that it was to India, not China, that Sri Lanka turned at the height of the Covid-19 pandemic to procure vaccines; only after the outbreak of a second wave of Covid in India did Sri Lanka finally, and controversially, ramp up imports of Sinopharm vaccines from China.

The domestic dimension

It goes without saying that these developments have a domestic dimension too, again centring on the IMF. On March 7, Wickremesinghe stated in Parliament that the Export-Import Bank of China had given written assurances to Sri Lanka supporting its debt-restructuring plans. According to Wickremesinghe, officials had signed the letter of intent for an impending IMF bailout on the previous day.

Wickremesinghe’s revelations on that day, and later on March 22 – after the IMF granted approval for the bailout – were positively received by Sri Lanka’s business elites. The Colombo Stock Exchange rose to a five-month high and the All-Share Price Index increased by nearly 200 points. Standard & Poor’s Sri Lanka 20 gained more than 30 points, while the Sri Lankan rupee appreciated by nearly 8%. While the rupee has slid since, the governor of Sri Lanka’s Central Bank, Nandalal Weerasinghe, has stated that he expects the economy to recover in the coming few months.

To be sure, the bailout has had its share of critics. These critics argue that all an IMF bailout does is encourage capital markets and foreign investors to resume the flow of funds into the country. They contend that Sri Lanka’s economic problems are much deeper than its lack of access to capital via these avenues, and observe that, if the country is to recover fully, it must prioritise essential imports, cut back wasteful expenditure and promote food security.

The government’s response to protests against the IMF’s conditions for the bailout, including amendments to the tax regime, has also come under much criticism. Yet here, too, there is no consensus over the reforms that have provoked these protests. While the heads of certain INGOs and think tanks, as well as the Core Group on Sri Lanka at the UN Human Rights Council, have condemned the government, these individuals and institutions have merely argued against using IMF-backed reforms to stifle dissent, without questioning the link between the recent upswing of protests and the enforcement of neoliberal reforms. After a long spell of silence, the IMF recently denied rumours that it was intervening in the country’s political and electoral process. In an official statement, the IMF said that it did not ask the government to postpone local government elections, whose delay has become a major bone of contention in Sri Lanka.

All in all, there is little doubt that the IMF bailout stands at the centre of these tensions, domestic and international. For all of the government’s rhetoric about “multi-aligned” and “neutral” foreign policy, Sri Lanka remains, as ever, a pawn in the geopolitical game playing out across the Indian Ocean – and the wider Indo-Pacific region.

Uditha Devapriya is a freelance columnist. He is the Chief International Relations Analyst at Factum, an Asia-Pacific-focussed foreign policy think-tank based in Colombo (www.factum.lk).

This article originally appeared at Himal Southasian.

Taking Sri Lankan Foreign Policy to the Post-Confrontational Phase

The government’s external policy strength lies in the position of equidistance it is now maintaining with regional, continental and global powers.

Sri Lankan President Maithripala Sirisena (right) with Prime Minister Ranil Wickremesinghe. Credit: Reuters

Foreign policymaking is infinitely more complex than what politicians in the opposition, or those who are aspiring to come to power, want the public to believe. Sri Lankan’s leaders have been learning this simple, yet fundamental lesson, since last January. That is why the foreign policy positions of the current government seem to have been in a continuous state of flux.

There is a good reason for it to be so. The government has been compelled to confront a number of factors and pressures in establishing its own ‘foreign policy identity’. I do not think there is yet evidence to suggest that the government wants to have, or has been able to establish, a firm ideological identity in its external relations, as has been the case with many governments in the past, particularly the previous one of Mahinda Rajapaksa. Avoiding an ideological identity in its foreign policy strategies seems to be a key defining feature of the Maithripala Sirisena-Ranil Wikremasinghe administration at present.

Some see this flexibility as a weakness of the government. There is, however, another way of looking at it. It represents the essential dimension of pragmatism in foreign policy, necessitated by a range of complex domestic, regional and global factors. Muddling through is not necessarily a sign of weakness, or a prelude to disaster, in a context where the government has been experimenting with different responses to some key foreign policy determinants.

What are the key determinants that have shaped Sri Lanka’s foreign policy since January last year? We can put them in two groups.

Regime change

The first is electoral and regime change compulsions. Any new government would want to steer a new path of foreign policy. Given the atmosphere of extreme hostility between the two camps, the new government was compelled to abandon immediately the foreign policy orientation of Rajapaksa. The new orientation was seen in the restoration of closeness with regional as well global powers that had earlier been marginalised. This core dimension of Sri Lankan foreign policy continues with only a slight change.

This change is felt primarily in relations with China. Beijing had maintained a close political proximity to the previous government and its leadership. China’s aloofness to the emerging opposition during even the last months of 2014 was somewhat inexplicable too. All this led the new government to adopt a policy of distancing itself from China, both politically and economically. One could even detect some degree of tension between Sri Lanka’s new establishment and the Chinese government; this became somewhat noticeable with regard to the Colombo Port City development project. The government has since passed that initial phase of uncertainty and now appears to have refined its core foreign policy stance to be ‘friendship with all; enmity with none’.

Domestic factors

The second key determinant was the continuation of the central role that the ethnic conflict and civil war had played in bringing together in a symbiotic framework Sri Lanka’s domestic politics and external relations. New York, Geneva, Washington DC, London, Brussels and New Delhi were the key cities that constituted the centres of its global geography. Geneva – home to the UN Human Rights Council – in March and October 2015 symbolised this process of re-configuring Sri Lanka’s global relations and strategies. For the first time since 2009, we could see the Sri Lankan government, the UN, the EU and Western governments – the West-led managers of the global political system – sitting and talking to each other as friends, committed to a shared goal of post-war peace-building and development in Sri Lanka.

This reconfiguration of the external appeared to have run into some difficulty by late last year. Its cause was primarily domestic. And it entails Sri Lanka’s severe balance of payment crisis, triggered off by the mounting debt crisis and the poor record of incoming private foreign investments. The new government has also come to realise that its newly found Western allies were not really ready to assist Sri Lanka in managing the emerging economic crisis in any substantive way.

Understandably, for the Sirisena-Wickremasinghe government, there was no free lunch coming from Europe or America. Whatever little that came had political conditionalities attached. Faced with a potentially disastrous economic downturn, the government seems to have decided to re-recalibrate its external relations. This is the only way to explain the government’s re-examination, of late, of a policy of closer and more robust economic relationship with China, despite continuing domestic criticism, coming from allies as well as opponents. There is no free lunch from Beijing too, though.

A point that may interest the observer is that the government has so far been careful to emphasise the economic dimensions of its closeness to China, thereby playing down the possibility of any political/strategic and ideological closeness. This is one point by which this government seems to sharply differentiate itself from the previous one. There was a strong view in the country that China was backing the authoritarian project of the previous government’s leadership, closing its eyes totally to issues of democracy, human rights and corruption.

The Chinese leadership is unlikely to abandon its personal and political closeness with Sri Lanka’s former president. In foreign policy matters, China is also known historically for its utmost pragmatism in the service of national interests. What seems to be happening is that the China has regained the initiative in restoring its relations with the new Sri Lankan government at a moment when it can define the terms of engagement from a position of advantage. This perhaps is the only foreign policy setback the new government has experienced.

Meanwhile, domestic issues seem to continue to maintain the upper hand in defining the trajectories of Sri Lanka’s external relations. Let me explain this point by citing just one prominent example.

This government’s overall record of domestic policy and policy reforms has been one of marginal achievements. Its major victories on the domestic front continue to be negative ones – negative in the sense of achievements made by not doing certain things, rather than doing things with aggressive intent. Therefore, this government’s exemplary record of restoring and maintaining an open, democratic and non-repressive political ambience in the country, is more a product of preventing the state agencies doing certain things, than taking positive steps such as abrogating the Prevention of Terrorism Act, or taking concrete steps towards demilitarisation. There are, of course, good reasons to explain this poor positive democratisation record. Yet, they hardy justify the government’s continuing record of negative achievements. Thus, the government has already begun to lose the loyalty of its ‘natural’ domestic constituency – the democratic civil society movement.

Meanwhile, only in three areas does the government seem to have been successful. As already mentioned, managing external relations through a strategy of policy flexibility is one. The other two are (a) arresting the process of Sri Lanka’s drift towards hard authoritarianism, and (b) keeping its opponents – the so-called joint opposition – at bay, preventing its growth into an imminent political threat to regime stability. Actually, this government’s strength lies in the weakness of the loose coalition of its parliamentary opponents, who incidentally are MPs of the United People’s Freedom Alliance coalition, which Sirisena heads.

A path forward

The success on the external relations front is primarily characterised by the government’s ability to establish a policy regime of equilibrium vis-a-vis major regional, continental and global powers. However, that success runs the risk of being undermined by a failure in a crucial domestic issue with international consequences. This refers to the proper implementation of promises and pledges made in the Geneva resolution last year on post-war peace building, ethnic reconciliation and state reform.

The evidence so far suggests that the government might try to defend its poor performance record, or the weak report card, because it has to do it any way in Geneva by citing domestic difficulties. To defend it internationally, the government might also need to recalibrate its external relations and seek new domestic as well as global allies who are skeptical of, and even opposed to, the Geneva process. This is the topic that Sri Lanka’s foreign policy watchers of domestic political developments, myself included, would monitor with great interest during the next few months to come. While seeking new allies, Sirisena or Wickremasinghe should not ignore the broad coalition that made possible the regime change of January 2015. Nor should they turn their back on the reform agenda for good governance, democracy, and peace building. Now is the time for them to take some serious steps towards course correction. Revisiting the January 2015 reform agenda will certainly be helpful.

Meanwhile, the government’s foreign policy activities are being conducted through two centres – the president’s office and prime minister’s office. This is an extremely interesting new development. The thinking and action at both centres so far seems to be complementary, although there is no proper public acknowledgement of it by the leaders themselves. In fact, the re-negotiation of economic relations with China appears to have been undertaken by both the Sirisena and Wickremasinghe.

There seems to be policy convergence between the Sri Lanka Freedom Party led by Sirisena and the United National Party led by Wickremasinghe. Both centres show signs of being non-ideological, non-combative and principled in their perceptions of the world and global affairs. Quite significantly, and refreshingly, they don’t have advisors who give long lectures to Western diplomats in their capitals on international law, politics or colonialism. Sirisena’s modest and simple personal demeanour is an added asset. It is the policy of ‘friendship with all, enmity with none’ that in my view has made it possible for the president to be invited to the G-7 Summit.

The government’s foreign policy strength perhaps lies in the position of equidistance it is now maintaining with regional, continental and global powers. In a world where (a) there is no bipolarity, and there are old and emerging global powers in rivalry as well as acting in cooperation, and (b) regional centres of power emerging as important players in the global arena, Sri Lanka’s foreign policy should not be informed by dogmatic adherence to ignorance. This government has taken Sri Lanka’s foreign policy to a post-ideological, post-egoistic, and post-confrontational phase. Some critics may not see the value of it. Yet, the realisation of it is no mean achievement for any government.

Jayadeva Uyangoda is Retired Professor of Political Science, University of Colombo. This article has been adapted from the presentation the author made at a panel discussion on “Sri Lanka in Global Affairs: The Journey Since January 2015,” in Colombo on June 16, 2016.