Sri Lanka President Gotabaya Rajapaksa.
Sri Lanka President Gotabaya Rajapaksa.

Sri Lanka linked mega infrastructure projects with tourism and is paying a heavy price for it. But rising to the occasion, China, India, and Japan may come to the rescue of the debt-ridden vital nation.

Sri Lanka in South Asia built fancy express highways, ports, civilian and military airports, port cities, and power plants during the last decade. Many of these big-ticket projects were directly linked to facilitating income to the tourism industry, a major source for the national exchequer.

As tourism dried up in the imports-reliant nation due to the pandemic, experts said they turned white elephant projects with low returns.

Under President Gotabaya Rajapaksa, the country of 21.41 million people unveiled plans in early 2021 to become the first nation in the world to turn its agriculture 100 percent organic by banning chemical fertilizers. But today Sri Lankans are left with less to eat as imports have become a costly affair because of the growing balance of payment crisis.

The shortages of essentials like cooking gas, fuel, medicines, and certain food supplies like milk have become the order of the day in the Island nation, which is passing through an economic emergency imposed on Sept. 1, 2021, amid dwindling forex reserves, soaring inflation and depreciating currency.

The paucity of funds made essentials and raw materials costly as inflation surged to 12.1 percent in December from 9.9 percent in November. The economy contracted by 1.5 percent in July-September 2021, the central bank said.

Sri Lanka has foreign debt obligations exceeding $7 billion in 2022, including repayment of $1 billion in July. Its total outstanding debt would be $6.9 billion this year.

Currently, more than $5 billion it owes to China, besides it has to pay an additional $1 billion loan raised from Beijing in installments.

Sri Lanka owes money to many other nations, including Japan and India. However, the country is left with $1.58 billion worth of forex reserves at its disposal as of November 2021.

Due to the strategic location of the country and its international ports, there was no shortage of money for Sri Lanka to come from India, China, and Japan when it went for an infrastructure spending spree. China and India even vied with each other to bag lucrative infrastructure projects in the vital Indian Ocean nation.

India considers the Indian Ocean region as its strategic backyard and is worried over rival China's growing economic clout in Sri Lanka.

Japan and India are members of Quad, an Indo-Pacific group that also includes the US and Australia, aimed at countering Chinese influence in the region.

China considers Sri Lanka to be a critical link in its Belt and Road Initiative (BRI) and its Foreign Minister Wang Yi went to Sri Lanka Jan. 9 and discussed extending a new batch of loans.

As Sri Lanka's credit rating has taken a severe beating, talks on deferred payments on international bonds are not progressing well for the country that depends heavily on tourism and trade.

The tourism industry contributes 10 percent to the country's GDP and is a major source of foreign exchange. However, the industry is hard hit by the pandemic.

Sri Lanka's credit rating has been downgraded by major rating agencies like Fitch Ratings and Moody's Investors Service due to inordinate delays in obtaining new funds, which are necessary to meet its loan commitments. A few experts have said that Sri Lanka is on the verge of defaulting.

The debt-ridden nation has already approached India and China, its fourth-largest lender, for assistance in restructuring loan repayments to meet its growing balance of payments crisis.

Ruling out an IMF bailout, the central bank is holding talks with China to secure a new batch of loans, in addition to the $500 million loan and $1.5 billion currency swap extended by Beijing.

With China, Sri Lanka is also seeking a concessional trade-credit plan for imports. To boost its tourism industry, Sri Lanka has asked China to send in more Chinese visitors under the bio-bubble concept.

On Jan. 18 India extended a $500 million-Line of Credit (LOC), days after providing $900 million relief. With New Delhi, Sri Lanka is hoping to rake in a total of $2.4 billion in assistance.

On the same day Sri Lanka received the LOC from India, the country's central bank serviced a sovereign bond for $500 million.

For the three Asian powerhouses, the strategic nation on the Indian Ocean is too big to fail, especially a few years after a bloody civil war.