Factum Perspective: Lanka-Sino Ties and Criteria for “Win-Win” Economic Diplomacy

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Factum Perspective: Lanka-Sino Ties and Criteria for “Win-Win” Economic Diplomacy

By Shiran Illanperuma

China has long insisted that its overseas investments through the Belt and Road Initiative (BRI) are based on the principle of “win-win”. That is, Chinese investment is geared towards mutual benefit, and should not go too far into the extremes of charity on the one hand, and exploitation on the other – the former leading to addiction, and the second to pauperization.

Chinese investment, although often concessional, is always commercial and carried out with the expectation of a financial return. Meanwhile, Chinese investment recipients are offering incentives such as equity in new infrastructure or natural resources instead of cash, for investments in projects deemed too risky by Western companies and multinational institutions. .

In bilateral terms, the win-win must be measured not only by project, but also on the final results of the commercial interactions between two countries. For example, although China has a trade surplus with many developing countries, its investments abroad through the Belt and Road Initiative (BRI) are helping to recirculate some of this capital. in developing countries. Events such as the annual China International Import Expo (CIIE) also indicate that China is serious about increasing imports.

Ideally, this is what any country with a large current account surplus should do, in order to avoid political conflicts or the economic collapse of its trading partners. Unlike China, Germany has a massive current account surplus which is destabilizing the European Union. Despite being Sri Lanka’s largest source of imports, the Chinese side has not publicly commented on import restrictions, while EU envoys have warned Sri Lanka and deployed human rights concerns as a method of extra-economic coercion.

Port and port city of Hambantota

The Lanka-Sino relationship provides a reasonable model of what win-win economic diplomacy might look like. The Hambantota Port and Port City Colombo projects are BRI flagship investments in Sri Lanka. The former is a deep-water port located ten nautical miles from one of the busiest shipping lanes in the world, while the latter is on its way to being a service-oriented Special Economic Zone, built over 269 hectares. of land reclaimed from the Indian Ocean and annexed to the city. from Colombo.

The Port of Hambantota, with its adjacent industrial park, will generate export-oriented manufacturing activity and also provide an outlet for agricultural exports from neighboring districts. Port City will focus on real estate, financial services, healthcare and education. Both projects are high level foreign exchange generators, the first focusing on the primary and secondary sectors, while the second focusing on the tertiary sector.

The complementarity of these two investments is made even more interesting by the analysis of their mode of financing. The Port of Hambantota was financed by loans amounting to US $ 1.3 billion at interest rates between 2% and 6.5% from the Chinese bank EXIM. These funds were presumably used to pay the main contractor China Harbor Engineering Company (CHEC).

If CHEC had left with the money after fulfilling their contract, it would have been like any other business venture. But the company, which has a long history as an entrepreneur in Sri Lanka, decided to stay and become an investor and operator, investing US $ 1.3 billion in the Port City Colombo project – the biggest investment ever. direct foreigner from Sri Lankan history.

From a national accounts perspective, Sri Lanka received two major export-oriented infrastructure projects for next to nothing. Indeed, the same amount borrowed to pay CHEC for the construction of the Port of Hambantota was then reinvested by CHEC to build Port City Colombo. The net amount that remains to be paid to the Sri Lankan party is the interest on the original loan.

The Hambantota Port and Port City projects, far from being a debt trap, are positive examples of how countries can balance their bilateral balance sheets while safeguarding their trade interests.

Win-win as economic diplomacy

The foreign currency crisis in Sri Lanka, the immediate cause of which is the COVID-19 pandemic which has cost the country about $ 3 billion in tourism revenue for two consecutive years, has led the government to restrict imports and s ” engage in bilateral currency exchanges. arrangements for managing foreign exchange reserves.

Avoiding the IMF and maintaining such a strategy requires navigating a diplomatic tightrope – it’s difficult, but it is doable. Sri Lanka’s current account deficit is mainly caused by its trade deficit of around US $ 7-8 billion. India and China together account for half of Sri Lanka’s exports. Meanwhile, refined petroleum is Sri Lanka’s main import, accounting for 10% of the total, and comes mainly from India, Singapore and Malaysia.

While countries like Germany may be unreasonable to demand that Sri Lanka relax import restrictions, Sri Lanka is relatively powerless to challenge these countries on its own. The point is, although Germany has an overall current account surplus, it has a (minor) trade deficit with Sri Lanka, as it is a major market for clothing exports, while the Sri Lanka’s purchasing power is too low to import high-end German products.

Therefore, Sri Lankan diplomats will need to work closely with their counterparts in countries like India, China, Malaysia and Singapore with which we have large trade deficits. Our diplomats must encourage these countries to reinvest their trade surpluses in Sri Lanka in the form of credit or FDI. Negotiating import credits for fuel, attracting investment in domestic oil refining or renewable energy capacity are key areas that should be prioritized.

Scientific analysis of Sri Lanka’s external track record with other countries can help formulate a stable foreign policy based on win-win policies. This can help defuse geopolitical tensions and allay perceptions of one-off and unprincipled realignments with major power blocs, which can only hurt a country’s reputation as a trading partner and ally.

(The author is a research analyst at Econsult Asia, a financial and management consultancy firm.)

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Disclaimer – Factum is a Sri Lanka-based think tank providing international relations analysis and public diplomacy advice in Sri Lanka and Asia. Visit – www.Fatum.LK


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