Sri Lanka to Receive Highest FDI from China

Sri Lanka is set to receive its biggest foreign direct investment FDI from China for the construction of an oil refinery worth $3.7 billion. This massive investment takes place at a time of a state visit to China by President Anura Kumara Dissanayake and complements the Chinese BRI. However, the project has instigated debt traps and geopolitical risks, and questions mark Sri Lanka’s economic sustainability, particularly regarding India’s strategic sensibility into the Ocean region.

Key Investment Details

Project Overview: Out of it, $3.7 billion will be spent on building an oil refinery by China’s Sinopec. This refinery has been planned to produce a capacity of 200,000 barrels per day to cater to the increasing domestic fuel demand of Sri Lanka. Also, through exports it intends to produce foreign currency.

Agreement: The agreement was completed between the Srilankan Ministry of Energy, power, and Energy, and Sinopec. It prefers to locally sell the fuel in Sri Lanka rather than export it.

Geopolitical Context

• Growing Chinese Influence: A problem for India is that the refinery was built near the Hambantota port over which China has obtained a 99-year lease.  In response, India has plans for its energy projects, a $1.2 billion fuel pipeline to Trincomalee to counterbalance Chinese influence on the region.

• China’s South Asia Strategy: China has been actively opening its economy in South Asia, Sri Lanka in particular as a part of the Belt and Road bilateral cooperation. India sees this as a part of China’s intent to surround it and threaten its diplomatic hegemony in the area known as South Asia.

• Regional Rivalry: Historically India has always regarded Sri Lanka as its backyard and any Chinese incursion into the Sri Lankan infrastructure and energy sectors poses a threat to Indian influence in the region.

• India’s Reaction: India sees China's growing influence in Sri Lanka and to some extent in the entire Indian Ocean region as a threat

Economic Context

• Debt Trap is concerned with the Indian Ocean which serves as a shipping Lane. This project also increases India’s concern over the increasing adventurousness of China in the region.

• Sri Lanka’s Financial Strain: Earlier there were concerns regarding Sri Lanka’s debt, especially from the Chinese which have been identified above. The act of leas­ing the Hamban­to­ta port is often described as a ‘‘debt pe­netra­tion’’ where the Sri Lankan gov­ern­ment ris­ingly found it­self in pos­sess­ion of sig­nif­i­cant debt obli­ga­tions it could not dis­solve and as a con­se­quence of which lost the port.

• Economic Crisis: Sri Lanka faced a severe economic crisis in 2023 leading to $46 billion in foreign debt. Currently, the nation is open to all types of economic risks, and speculations on its reliance on Chinese money.

Sri Lanka’s Balancing Act

Sri Lanka is in the process of managing affairs with China and India - two regional giants that have conflicting interests. India has signed many arrangements of various nature with the country and has leased out an oil tank farm and granted licenses to Indian enterprises.

Economic Competition

• Energy Market Threat: India which currently supplies fuel to Sri Lanka faces stiff competition from Sinopec following the company’s investment in the Refinery. Sinopec being overly obsessed with achieving market exclusivity in Sri Lanka will undermine IOC’s 20% market stake which jeopardizes India’s economic stronghold.

• India’s Counter Projects: India immediately offered a $1.2 billion fuel pipeline to Trincomalee, but Sri Lanka may become a victim of China’s first-mover advantage in the energy sector.

Diplomatic and Strategic Relations

• Sri Lanka’s Neutrality: At the same time, as China’s influence rises, the achievement of balance between China and India becomes increasingly difficult for Sri Lanka. This means India must develop diplomatic tactics that will enable Sri Lanka not to take part in any regional conflict.

• Counterbalancing Chinese Influence: Some attempts by India to checkmate the Chinese influence may fail, for instance, the Trincomalee pipeline because China has heavily invested in the Sri Lankan infrastructure.

Significance of the Issue for India’s South Asian Policy

• Threat to Regional Leadership: New stronger cooperation and relations between China and Sri Lanka threaten India’s hegemony in South Asia more than ever before. India could have to turn more assertive in investing in and diplomatically engaging with the neighboring countries to retain its influence.

• Strengthening Maritime Strategy: China’s continuous expansion in the Indian Ocean is likely to bring about India’s improvement of its maritime strategy, making the contest between India and China in the Indian Ocean even more vehement over the strategic sea lanes.

Conclusion

The decision to host the largest foreign direct investment by China was a new historic chapter in the Plea’s economic and foreign policy. Thus, the $3.7 billion oil refinery project, which guarantees fuel supply and revenues, is questioned concerning debt pitfalls, commercial losses, and political unrest. While Sri Lanka needs to strengthen its relations with China and India there is a risk of over-reliance on one country in particular that must be avoided. The result of this project must therefore go some way towards determining the direction of the Sri Lankan economy as well as its strategic place in the geopolitics of the Indian Ocean region.