By Shakthi De Silva, Bandaranaike Centre for International Studies
Sri Lanka teeters on the edge of a grim economic precipice, entering 2022 with foreign currency reserves sufficient only for a single month of imports. Domestic inflation rose to a decade-high record in 2021 following a surge in food prices triggered by import restrictions, a significant drop in the Sri Lankan rupee value, and the government’s decision to print more money.
Sri Lanka is saddled with annual foreign debt settlements of US$4.5 billion for the foreseeable future. Notions of an investment-friendly hub are satirized by the reality on the ground, with people standing in long queues waiting for daily essentials like milk powder and gas cylinders for cooking. These developments come amid an economic slowdown brought about by COVID-19, poor fiscal and monetary policies, and an abrupt decision to ban the importation of chemical fertilizer which gravely impacted local harvests.
The decision was made in April 2021 by an ‘out of touch with reality’ President Gotabaya Rajapaksa who believed that a prohibition on chemical fertilizer would increase his popularity as a promoter of organic farming and save much-needed US dollars flowing out of the country. His attempt to proverbially ‘kill two birds with one stone’ backfired dramatically. Protests erupted throughout the country as farmers took to the streets demanding the continued importation of chemical fertilizers or the provision of a substitute organic fertilizer.
The Gotabaya regime reached out to China and imported organic fertilizer from Qingdao Seawin Biotech. Initial tests on samples carried out in Sri Lanka confirmed that Qingdao’s fertilizer contained a microorganism identified as ‘Erwinia’ which could cause crop failure. The Ceylon Fertilizer Company halted payments to Qingdao Seawin Biotech for the organic fertilizer. The Colombo High Court promptly ordered Sri Lanka’s People’s Bank to freeze the disbursement. The ship carrying the consignment of Chinese fertilizer was also denied entry into Sri Lankan ports.
Qingdao Seawin Biotech responded by demanding an US$8 million compensation from Sri Lanka’s National Plant Quarantine Services, asserting that failure to pay the sum in three days would result in legal action. The Chinese Embassy in Colombo tweeted that Sri Lanka’s People’s Bank would be blacklisted for freezing payments, despite the bank simply adhering to the High Court’s ruling. A local journalist observed that ‘by slapping sanctions on People’s Bank, China could be showing disregard for domestic legal procedures, despite consistently maintaining internationally that it respects each country’s local processes, independence, and sovereignty.
The ship did not return to China after being blocked from entry to Sri Lanka. Instead, it left for Singapore and reportedly changed its name. Vessel tracking technology helped reporters locate the ship in Hambantota in southern Sri Lanka where China currently manages a port under a 99-year lease.
China’s heavy-handed approach forced the Sri Lankan government to back down. A government spokesperson stated that 75 percent of the US$8 million will be paid out as compensation to Qingdao Seawin Biotech, despite Sri Lanka’s foreign exchange crisis. Sri Lankan Agriculture Minister Mahindananda Aluthgamage admitted that ‘we cannot afford to damage diplomatic relations over this issue. This highlighted the degree of leverage that China exercised.
Recent reports indicate that Sri Lanka plans to order a new consignment of organic fertilizer from Qingdao Biotech even though the company doubled the price of fertilizer that was initially agreed upon by the two parties. The Agriculture Minister also designated a committee to alter quality standards to enable Qingdao Biotech’s fertilizer to be imported and, in a move to conform to Qingdao’s demands, fertilizer samples will be tested in a laboratory recommended by the company. The incident reflects Beijing’s ability to arm-twist small states when they challenge a Chinese firm or the Chinese government’s stance.
Sri Lanka’s weak economic position, coupled with the Rajapaksa family’s past connections with Chinese President Xi Jinping, undermines Sri Lanka’s ability to exercise independent agency and autonomy. The fertilizer debacle also demonstrates the likelihood that small states — particularly ones facing economic hardships relating to debt repayment — will be forced to swallow China’s ‘bitter pill’ regardless of whether it is in the national interest of the country.
(Shakthi De Silva is a Visiting Lecturer at the Bandaranaike Centre for International Studies and is currently pursuing his postgraduate studies at the National University of Singapore.)