Sri Lanka’s Economic Crisis, and the Strategic Implications for the Indo-Pacific

Matthew Dodwell


With all the trouble in the world at the moment, you’d be forgiven for missing the crisis brewing in Sri Lanka. The island nation is facing its worst economic collapse since its independence in 1948, largely created by its own government. Most of the blame has been attributed to President Gotabaya Rajapaksa (nicknamed ‘Gota’) and his family members—one who served as Prime Minister, and another three who served in his cabinet until this crisis unfolded.


The reasons for this economic crisis are numerous and convoluted. At the centre of it is gross government mismanagement and a lack of understanding of basic economics. Today, the government is broke, and the economy has stalled to the extent that citizens are unable to buy essential items. Many are forced to queue for hours to get basic necessities, including food, fuel, and medicine.


Anger has now turned to violence. Protests in Colombo, Sri Lanka’s largest city, are commonplace, and Gota is facing repeated calls to resign. In early April, nearly the entirety of Gota’s cabinet stepped down, including his brother, then Finance Minister Basil Rajapaksa. A month later, the Prime Minister resigned amidst violent protests, but Gota has so far refused to leave office.


Sri Lanka has suspended its foreign debt payments in order to free up cash to pay for imports and reduce the hardship on its people. Sri Lanka was due to pay US$4 billion this year (including US$1 billion due in July) from its total of US$50 billion debt, but will now work with its creditors to work out alternative repayment plans.


In the backdrop of this crisis are the seeds of strategic competition over Sri Lanka. China has strategic interest in Sri Lanka, and if the Western world is wise, it will too.


Gota has requested help from both China and India, the two powers between which Sri Lanka has often pivoted. New Delhi has already issued US$1.5 billion in credit lines, and although Beijing hasn’t acted yet, Sri Lanka’s ambassador to China is confident that Sri Lanka will shortly secure US$2.5 billion in aid from China.


Beijing has strategic interest in coming to Sri Lanka’s aid. Doing so will increase its influence in the island, which it can later exert to expand its Belt and Road Initiative. Sri Lanka, located off the east coast of India, will help join China’s String of Pearls, a proposed chain of military installations between China and Europe. Beijing will also be considering Sri Lanka’s geographic proximity to India, an ally to the United States (through the Quad), and a state that China has had a complex relationship with. Influence in Colombo can eventually turn into a military base off India’s coast, similar to China’s base in Djibouti and potential base in the Solomon Islands. This would be well-placed to deter India and contain it in any future conflict in the Indo-Pacific.


Western democracies should see Sri Lanka’s crisis as an opportunity to step up. In a deteriorating strategic environment where lines are being drawn and the world’s superpowers are competing for influence and support, the West must act to prevent Sri Lanka falling into China’s sphere of influence. Sri Lanka’s economic crisis is entirely of its own making, but the international community must refrain from looking down its nose and tut-tutting Sri Lanka’s poor financial decisions.


Although Gota has embraced China in recent years, India’s assistance to Sri Lanka has swung the balance of influence back towards New Delhi. Actions are more meaningful than words, and this is an opportunity to strengthen relationships with Sri Lanka and build on a coalition of liberal democracies in the Indo-Pacific.


The International Monetary Fund (IMF) is the Western world’s tool of choice in aiding failing economies, but it’s not always an easy tool for governments to accept. IMF support is often conditional on the basis that the recipient country implements economic reforms. These reforms are often harsh and unpopular with the country’s population.


Likely remembering Greece’s economic woes and subsequent protests towards IMF reforms, Gota initially declined to work with the IMF. However, Sri Lanka’s situation has now worsened to the point that Gota’s government is now in talks with the IMF over a bailout package. This speaks volumes about the situation in Sri Lanka; Gota’s government cut taxes to encourage spending, but IMF aid would likely require Gota to increase taxes again to earn government revenue. This would serve to further agitate protests against him. Not only would he be increasing taxes and making life harder for Sri Lankans, he would also be implicitly acknowledging that it was his government’s actions that contributed to Sri Lanka’s hardship in the first place.


Drastic measures are going to need to be taken to mend Sri Lanka’s economy, and the country is going to hurt for a while to come. Sri Lanka may accept the IMF’s aid and its conditions, but there is more the international community can do to support the struggling country. India’s assistance is a step in the right direction, and as the best-placed member of the Quad, it should lead efforts to support Sri Lanka. Other states must chip in to support, whether it be financial assistance or through the provision of essential items, such as food, fuel, and medicine to win over Sri Lanka. It will take a unified effort to counter Beijing and prevent it from gaining a foothold in Sri Lanka.



Matthew Dodwell is an Editor for the Insights blog. He has recently graduated with a Masters in International Relations from The University of Melbourne, where he focused on security issues in the Middle East and the Indo-Pacific.