Debt Traps & Terrorism: The Roots of Sri Lanka’s Crisis

July 17, 2022 (Brian Berletic - New Eastern Outlook) - The island nation of Sri Lanka, located south-southeast of India in the Indian Ocean has suffered economic and now political chaos that has grabbed international headlines.

The Western media has floated narratives ranging from “debt trap diplomacy” perpetrated by China and its Belt and Road Initiative to food shortages spurred by Russia’s “blockade” of the Black Sea. None of this is true, and even within the pages of Western newspapers, this truth is eventually admitted.

Sri Lanka’s History of Crisis

Sri Lanka is a nation that has suffered political and economic turmoil since gaining independence from the British Empire in 1948. Like many former British colonies, Sri Lanka inherited deep ethnic and religious divides purposefully perpetuated by the UK and then the US in a bid to maintain Western influence over the ostensibly independent South Asian country. The worst manifestation of this was the Sri Lankan Civil War stretching from 1983 to 2009.

For 26 years the nation faced a taxing armed conflict against the Liberation Tigers of Tamil Eelam (LTTE) composed of Indian Tamils. While there existed genuine ethnic tensions in Sri Lanka, the 26 year long conflict resulted from clandestine support from the US and likely India, both in terms of funding and arms, as well as oblique political support.

US diplomatic cables now publicly available thanks to Wikileaks show how the US embassy in Colombo and representatives of the United Nations’ Office of the High Commissioner for Human Rights (OHCHR) sought to tie the hands of the Sri Lankan government in eliminating the LTTE and how OHCHR staff met with LTTE members and with Washington’s backing, worked with them to form parallel institutions helping expand the LTTE’s political power and thus prolong the conflict.

Other cables reveal how Washington was aware of LTTE fundraising within the United States but took no measures whatsoever to address it.

The war cost the lives of between 80,000-100,000 people according to the United Nations and continues to overshadow national unity and progress to this day. It also undoubtedly cost Sri Lanka nearly three decades of normal economic development.

China’s Debt Trap Diplomacy?

In addition to the costs Sri Lanka paid and is still paying for the war, the nation is also facing crippling debt. Articles across the Western media like ABC News’, “China becomes wild card in Sri Lanka’s debt crisis,” squarely blame China for Sri Lanka’s crisis and warn the world that other nations doing business with China may face a similar fate.

The article claims:

China says its initiative to build ports and other infrastructure across Asia and Africa, paid for with Chinese loans, will boost trade. But in a cautionary tale for borrowers, Sri Lanka’s multibillion-dollar debt to Beijing threatens to hinder efforts to resolve a financial crisis so severe that the Indian Ocean nation cannot import food or gasoline.

Sri Lanka’s struggle is extreme, but it reflects conditions across dozens of countries from South Pacific islands through some of the poorest in Asia and Africa that have signed onto Chinese President Xi Jinping’s Belt and Road Initiative. The total debt of poor countries is rising, raising risks others might run into trouble.

Sri Lanka’s 22 million people are in dire straits. Foreign currency ran out in April, leading to food shortages, power cuts and protests that forced a prime minister to resign. Payment on $51 billion of debt to China, Japan and other foreign lenders was suspended.

Yet China only accounts for 10% of all debt owed by Sri Lanka. Another article, this time from Deutsche Welle titled, “Sri Lanka’s foreign debt default: Why the island nation went under,” admits that:

A financial crisis had been brewing for more than a decade in Sri Lanka, where International Sovereign Bonds (ISB) — or market borrowing — constitute a major portion of the country’s foreign debt.

The article also includes a graphic indicating that 47% of Sri Lanka’s debt is owed to International Sovereign Bond holders, 13% to the Western-dominated “Asian Development Bank,” 10% to China but also 10% to Japan, as well as another 9% to the World Bank, 9% to “others” and 2% to India.

China is hardly at the center of Sri Lanka’s debt crisis. Even at a glance, the World Bank and the Asian Development Bank, both dominated by Western financial institutions, hold far more of Sri Lanka’s debt than China. Worse still, when analyzing who actually holds the majority of Sri Lanka’s 47% of ISB debt, Nikkei Asia in a recent article would list US financial institutions and equity firms including BlackRock, Allianz, UBS, HSBC, JPMorgan Chase, and Prudential.

Not only is accusing China of precipitating a debt-driven financial crisis in Sri Lanka disinformation, the fact that it was repeated across the Western media illustrates just how deliberate and concerted efforts are to blame China for a crisis the West itself created.

Putin Price Hikes?

The Western media also continuously refers to the “war in Ukraine” as a driving factor for rising fuel and food prices, thus triggering an already economically troubled Sri Lanka.

The Washington Post in its article, “How war in Ukraine turned Sri Lanka’s economic crisis into a calamity,” claims:

…after war erupted thousands of miles away in Ukraine, diesel grew more and more scarce in Sri Lanka, leading to daily power cuts starting last month.

Neither the Washington Post nor many other Western media outlets promoting this narrative explain how “war in Ukraine” is causing any of these economic repercussions. Doing so would reveal that the US and its European allies, not Russia, are driving up prices by sanctioning Russian fuel, food, and fertilizer (made from petrochemicals), reducing supply and thus drastically raising prices.

When an explanation is required, citing Russia’s “blockade” of the Black Sea is usually mentioned, even after the Pentagon itself admitted during a briefing Ukrainian grain shipments are being blocked by naval mines deployed by Ukraine itself.

Solutions?

An announcement by the US and its allies reversing sanctions would likely send prices immediately in the opposite direction, providing relief for nations like Sri Lanka but also other nations around the globe including in the West – however unlikely that is to happen.

The real irony is that while the West accuses Russia and China of driving Sri Lanka into economic and political chaos, it will be Russia and China who stand the greatest chance of aiding the nation in its time of need. With Sri Lanka’s government stepping down and the nation facing an uncertain political transition, there are no signs at all that the US and its allies will relent regarding the various root causes of Sri Lanka’s crisis they retain the ability to resolve, nor any genuine offer extended to Sri Lanka by the West to aid the nation past this difficult juncture.

Instead, the West is offering Sri Lanka “assistance” through the International Monetary Fund (IMF), a scheme that almost always leaves a nation in even greater economic crisis. Again, the irony will be that Sri Lanka’s best hope to gain the upper hand over the IMF’s predatory practices will be if Russia, China, or perhaps even India intervene and assist in paying off any loan extended by the IMF.

Brian Berletic is a Bangkok-based geopolitical researcher and writer, especially for the online magazine “New Eastern Outlook”.