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Protestors in Colombo demand that President Gotabaya Rajapaksa resign over the country’s economic crisis. Photo: AFP

US, India and China vie to help as South Asian nations grapple with economic woes

  • Governments from Nepal to Sri Lanka and Pakistan are facing separate challenges, giving the major powers an opportunity to extend aid in return for further influence, analysts say
  • While China has backed development and aid across the region, its resurgent Covid-19 battle could boost India’s bid to support Washington’s Indo-Pacific Strategy
Diplomacy

In recent weeks, countries across South Asia have witnessed multiple changes. Sri Lanka’s new prime minister said earlier this week that the country’s economic crisis that has brought misery and unrest would “get worse before it gets better”. Further up north, Nepal is said to be heading towards a full-blown economic crisis.

Pakistan, too, is said to be heading towards bankruptcy amid a highly-charged political atmosphere and threats by ousted leader Imran Khan to launch a protest rally if fresh elections are not held.

These economies have also been reeling from the slowdown due to the pandemic, rising national debt, galloping inflation, depleting foreign exchange reserves, the ongoing war in Ukraine, and even economic mismanagement.

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The concurrent economic crises across South Asia are separate and do not appear to be linked, with hardest-hit Sri Lanka having almost no more petrol left, and Nepal struggling with power outages.

Nonetheless, these developments are not lost on the three major powers in the region: India, China and the United States, who have stepped up diplomatic outreach or economic assistance to the region.

Analysts say while the hardships faced by the South Asian nations have given major powers opportunities to extend a helping hand in return for further influence, regional countries also need to re-evaluate their dependence on Beijing and ensure a more balanced diplomacy especially between India and China.

02:07

‘Shoot-on-sight’ orders for Sri Lankan military trying to quell violent protests

‘Shoot-on-sight’ orders for Sri Lankan military trying to quell violent protests

The economic crises have also highlighted India’s indispensable role in the region, especially when China is still reeling from the economic fallout of the Covid-19 pandemic, experts say.

According to Shamshad Ahmad Khan, an assistant international relations professor at the BITS Pilani Dubai Campus, Sri Lanka said it had expected Beijing to waive some of its debts amid the crisis but when did this not happen, New Delhi gave it emergency loans and aid including petrol, which proved to be “a lifeline for people in Sri Lanka”.

Khan said that governments in the region had “learned the lesson that they can bank on India instead of China, should they face a similar crisis in future”.

“India’s overture towards Sri Lanka and Nepal has achieved twin purposes: weaning the establishment away from China and assuaging the concern of the public which considers India a big brother and interventionist in their domestic affairs,” Khan said.

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Anu Anwar, a fellow at Harvard University’s Faculty of Arts and Sciences, said that while India, being a fraction of China’s economic size, was unable to compete with China in South Asia, especially on the economic front, New Delhi had been able to leverage its long-standing cultural and political ties with its neighbours.

However, China’s ability to invest further in South Asia and open its economy to imports from these countries might be affected as it battles a resurgence of Covid-19 cases, Anwar noted.

“[This will] cause a serious toll on China’s traditional role such as its BRI projects,” Anwar said, referring to the Belt and Road Initiative, or Beijing’s massive global infrastructure programme aimed at increasing trade and improving regional integration.

India, in contrast, has been ramping up its strategic cooperation with the US and Japan under the Indo-Pacific Strategy and the Quad grouping, which also includes Australia, Anwar said.

“When it comes to the question of major powers’ role in South Asia, the strategic convergence among US, India and Japan is increasing, but the division between China and the rest is enlarging,” he said.

Under the US-initiated Indo-Pacific strategy, Washington says it will build a free and open region, bolster security and build resilience with its allies and partners, with an eye on China as a threat.

People wait to buy kerosene at a gas station amid a fuel shortage in Colombo. Photo: EPA-EFE

However, Long Xingchun, a South Asian expert and president of the Chengdu Institute of World Affairs, said that given the recent uncertain political situation in Sri Lanka, it would take time for China to undertake the necessary discussions on economic assistance with the new leadership.

Long said the current aid provided by China and India was emergency assistance aimed at easing the country’s turbulent situation, but was far from what was needed to solve the economic crisis.

Given the scale of the country’s crisis, Long said that Colombo had to turn to multiple countries including the IMF for assistance, as “no single country, including India, can claim to help Sri Lanka out of this economic crisis”.

“India’s overall economic strength and economic development are still insufficient, and it does not have enough ability to drive the economies of South Asia,” Long added.

01:44

‘It’s difficult to even have one meal’: Sri Lankan tea workers want better lives for their children

‘It’s difficult to even have one meal’: Sri Lankan tea workers want better lives for their children

Sri Lanka

In recent weeks, thousands of protesters have poured into the streets of Sri Lanka after enduring months of shortages, blackouts and rampant inflation.

When new Prime Minister Ranil Wickremesinghe was appointed last Thursday, US Ambassador to Sri Lanka Julie Chang was among the first to express support, but India’s envoy to Sri Lanka Gopal Baglay was the first to visit Wickremesinghe.

This reflects the long-standing significance of the island’s closest and largest neighbour, said Rajni Gamage, an independent researcher based in Colombo who has a PhD in political science and international studies from the University of Queensland.

Gamage said these actions by India and the US could feed into existing Chinese mistrust of multilateral actions taken by Washington and Delhi, but added that Wickremesinghe had spoken of a foreign consortium for financial assistance.

“If this [consortium] includes China as well, such tensions could be diplomatically managed,” Gamage added.

Opinion: Sri Lanka’s economic crisis has been decades in the making

Even though Beijing is critical of Colombo’s decision to approach the IMF for an emergency bailout, it has extended a US$1.3 billion syndicated loan and a US$1.5 billion-yuan denominated swap, while negotiations are said to be ongoing for more loans and credit lines.

Earlier this month, the Chinese-backed Asian Infrastructure Investment Bank was said to be considering granting US$100 million in emergency support to Sri Lanka.

A source quoted by Reuters last month said that New Delhi was keen for Colombo – which has an outstanding debt of about US$3.5 billion with China, or 10.8 per cent of the island’s total – to cut its reliance on Beijing. China has built highways, ports, roads, an airport and a coal power plant in Sri Lanka.

People wait to buy petrol at a gas station amid fuel shortage in Colombo, Sri Lanka. Photo: EPA-EFE

Pavithra Jayawardena, a senior international relations lecturer at the University of Colombo, said that given China’s emergence as a “special friend” during the last few years, there were expectations that Beijing would act proactively in supporting Sri Lanka when the economic crisis started.

However, that “did not really happen”, and as a result the government had to go to the IMF, Jayawardena said, adding that “Sri Lanka survived in April, because of India’s credit line as the country had completely run out of reserves to buy essentials”.

Jayawardena said it was time for Colombo to balance its ties between the regional powers and re-examine its approach of expanding relations with China.

“It is very unwise for Sri Lanka to bandwagon with China and let the tensions grow with India,” she said. “If India handles [the crisis] well, it has the potential to win the hearts of Sri Lankans about India as a true friend for Sri Lanka in need.”

01:29

Nepal’s newest China-built airport sparks tension with India

Nepal’s newest China-built airport sparks tension with India

Nepal

At the end of February, Nepal’s coalition government, led by the Nepali Congress Party, finally ratified the US$500 million Millennium Challenge Corporation (MCC) infrastructure and economic development grant from the US government, after a five-year delay.

It also signed a US$659 million development assistance agreement earlier this month with the US Agency for International Development, that will support the Himalayan country’s goal of graduating from a least developed nation by December 2026.

According to Nepal’s finance ministry, the US assistance will advance Kathmandu’s sustainable development through strengthened democratic governance, enterprise-driven economic growth and increased resilience for communities most at risk to natural disasters and climate change.

However, Chinese Foreign Minister Wang Yi described the MCC grant as evidence of “external influence” and “coercive diplomacy”, while the Chinese nationalistic tabloid The Global Times claimed the “MCC is nothing more than a pact with the geopolitical purpose of targeting China”.

In February, the US warned it could review its ties with Nepal if the government did not sign the pact, pushing Kathmandu to do so one day before the February 28 deadline.

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A month after the MCC was ratified, Wang headed to Nepal and signed nine agreements and documents with the Himalayan nation, focusing mainly on economic and technical cooperation, health, and the delivery of Covid-19 vaccines.

Wang also presided over a ceremony marking the finished construction of the Pokhara Regional International Airport, built with a US$216 million loan from Beijing and one of many China-backed projects, including airports, power plants and hospitals.

Santosh Sharma Poudel, foreign policy analyst and co-founder of Nepal Institute for Policy Research, said Beijing’s public displeasure over the MCC was unprecedented, adding that US influence was expected to increase given Washington’s growing engagement and assistance.

Poudel said Nepalese leaders were realistic about the country’s key partners – “India, China and the US, in that order” – and that it “will remain so for the foreseeable future”.

“The relative importance could change a bit, but the order is likely to remain, given Nepal’s interests,” he added.

A demonstrator in Kathmandu throws a burning tyre during a protest against the US$500 million US infrastructure grant under the Millennium Challenge Corporation. File photo: Reuters

Not to be outdone, India on Monday pledged to build a 695-megawatt hydropower plant in Nepal, during Prime Minister Narendra Modi’s day-long visit to Lumbini, where he met his counterpart Sher Bahadur Deuba.

Modi’s decision to bypass the inauguration of the new Gautam Buddha International Airport – built by China’s Northwest Civil Aviation Airport Construction Group and situated just 19km from Lumbini – was widely viewed as a snub to Beijing.

Poudel said while India had always been a key stakeholder in the development of energy in Nepal, there was now an added incentive as demand for energy was growing in India as it sought to shift from coal to renewable sources.

Pointing out that there was enough room for investments from both India and China, he added that Kathmandu “should make a conscious effort to frame the issue as a ‘development needs’ instead of a ‘balancing game’”.

Bhaskar Koirala, director of the Nepal Institute of International and Strategic Studies in Kathmandu, said the simultaneous issuing of aid projects and “complex geopolitics that will inevitably arise” would be challenging for the Himalayan country.

To manage the big power rivalries, Koirala said the tiny nation sandwiched between India and China ought to strengthen its economy and ensure political stability.

Former Pakistan leader Imran Khan addresses Pakistan Tehreek-e-Insaf members during a party convention in Lahore on April 27, 2022. Photo: AFP

Pakistan

In recent days, with inflation close to 13 per cent and food prices skyrocketing, Pakistan is said to be heading towards a Sri Lanka-like crisis.

Former prime minister Imran Khan, who was ousted last month through a no-confidence motion and replaced by Shehbaz Sharif, has threatened a march in capital city Islamabad unless fresh polls are called.

Though Pakistan has enjoyed a close, or what is commonly referred to as an “ironclad”, relationship with China in recent years, the change in leadership has prompted US Secretary of State Antony Blinken to telephone Pakistan Foreign Minister Bilawal Bhutto-Zardari on May 6, pledging to strengthen ties.

The US and Pakistan also held talks in Washington last week, where both sides discussed bilateral security concerns and the situation in Afghanistan.

Washington assured Bhutto-Zardari of strong US support in rebuilding the Pakistani economy and said it welcomed the country’s ongoing negotiations with the IMF.

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Pakistan is seeking to reach an agreement with the IMF for a US$1 billion tranche under an Extended Fund Facility. The week-long review will allow Pakistan to convince the IMF to revive a stalled US$6 billion package for stabilising its cash-starved economy.

China, in the midst of a tightening economic situation at home, had reportedly not made good on a pledge to reissue loans totalling US$4 billion that Pakistan repaid in late March.

Khan from the BITS Pilani Dubai Campus said the US was seizing the opportunity by engaging with Pakistan’s new leadership, adding that the phone call by Blinken to Bhutto-Zardari was aimed at bringing Islamabad back into Washington’s strategic orbit.

“Pakistan remains indispensable for the US,” Khan said, due to the geostrategic location of Pakistan amid turmoil in Afghanistan after the US withdrawal and the resurgence of the Isis-K, or the Afghanistan affiliate of Islamic State.

Given Pakistan’s long-standing rivalry with India primarily over territorial disputes in the Kashmir region, Islamabad will lean towards Beijing rather than Washington in the US-China rivalry, Khan said. “Pakistan would try to gain economic leverage with both the US and China as it has been doing in the past,” he added.

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Muhammad Ali Baig, a research associate at the Institute of Strategic Studies Islamabad, said Islamabad had often made it clear that the growing strategic partnership between the US and India was a catalyst for the strengthened relations between China and Pakistan.

Describing Shehbaz’s announcement last week to resume trade with India as a positive initiative, Baig said that the ongoing anti-Muslim violence in India continued to be a great concern for Pakistan.

Last week, Pakistan’s foreign office drew the international community’s attention to what it called the “aggravating situation of Islamophobia” in India, while urging New Delhi to to transparently investigate the incidents of widespread violence against minorities, particularly Muslims.

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