EU-Sri Lanka Relations: From Cooperation to Partnership

On 13 July 2022, after months of heavy protests, protestors stormed the Sri Lankan presidential palace. In what followed, then president Gotabaya Rajapaksa fled and resigned, being promptly replaced by his prime minister, Ranil Wickremesinghe, through a Parliamentary vote. Since the turnover the economic and political situation within Sri Lanka remains delicate. As the island has increasingly become a centre of Sino-Indian rivalries, how can the EU assist its economic and political development and help address the crisis, in order to stabilise the country and avoid it becoming a flashpoint of competing interests.

Sri Lanka has had a near constant history of internal struggle since its independence. Rivalries between the Sinhalese and Tamil ethnicities led to a civil war that was fought between 1983 and 2009. The death of the Tamil leader Velupillai Prabhakaran under president Mahinda Rajapaska ended the war but did not bring immediate prosperity and economic affluence to the island state. Hope was set on the development of the Hambantota port, opened in 2010 and built through a set of five Chinese loans. However, this has led to an external debt of 34.8 billion USD in April 2022 of which China was the largest bilateral creditor at 45%. The port and its facilities were built with an unsustainably large amount of borrowing and interest, making profitability seemingly unfeasible. Moreover, once operations began, the facilities, specifically the airport, being described as ‘empty’ did not help but instead demonstrated the lack of demand, and therefore business within the area.   

Altogether this culminated in Sri Lanka defaulting on its debt in May 2022 as it could not come up with the 78 million USD necessary to pay the debt’s interest. Struggles in acquiring gas, fuel, and kerosene, alongside high food inflation and a complete loss of tourism income due to the covid-19 pandemic resulted in considerable protests. Economic issues thus became political as policies including tax cuts and a fertiliser ban aggravated the situation. More specifically, the total fertiliser ban of April 2o21 had a strong negative effect on Sri Lankan crops and increased food inflation. Shortly after, the presidential palace was stormed by protestors and the president was forced to resign. Due to the resignation, Sri Lanka’s prime minister Ranil Wickremesinghe became the acting president, and later the official president as per Parliamentary vote on 20 July 2022. The 74-year-old has a longstanding political track record as a parliament member, starting in 1977, prime minister (1993-1994, 2001-2004, 2015-2018, 2018-2019, 2022) and opposition leader (1994-2001, 2004-2015). 

However his relationship with the Rajapaksa family is ambiguous. The Rajapaksas are native from the Hambantota region and have long been in power. Mahinda Rajapaksa was president from 2005-2015 and then prime minister under his brother, Gotabaya, between 2019 and May 2022. Gotabaya himself was secretary to the minister of defence during all of his brother’s presidency, as Mahinda was both president and minister of defence. The corruption of the Rajapaksa has been highly debated as holes were found in the funds of various infrastructure projects including highways. Moreover, it was suspected that Mahinda Rajapaksa used Chinese port funds for his 2015 presidential campaign. Altogether, this put Ranil Wickremesinghe in a difficult position as he, despite often leading the opposition against the Rajapaskas, was the final prime minister under a fleeing president, overseeing the government during the protests and the storming of the presidential palace.

Hence, he and all of Sri Lanka now stand in anticipation of the upcoming elections supposed to be held before September 2024 to address Sri Lanka’s many complexities. Yet there are  also multiple external actors and factors at play that should not be ignored.

Strategic Assets

When considering the Island’s strategic value, its geographical location stands out.  Sri Lanka is located west of the Malacca Strait, a small choke point located between Indonesia, Malaysia and Singapore, with a substantial amount of trade going through the area. Trade coming from the Suez Canal or through the Strait of Hormuz must pass near the island when moving on to the Malacca Strait. Hence, as a maritime prime location Sri Lanka possesses a high strategic value. It is a potential trade hub connecting the European, Gulf, and East Asian markets.  

Concerning its own market, Sri Lanka remains an agricultural State. That industry employs 32% of its population. About a quarter of the island is arable, of which a third is dedicated to rice production. However, it does also produce and export tea, spices, textiles, jewellery, tobacco and boats according to its own export development board. Thus, most of its production is based on primary goods with some more developed exports.

Some of these exports land in India, however they’re only worth 6.05 billion INR (73 million USD). Yet, Sri Lanka does stand to benefit as a neighbour to India, a rising power in the global arena. 26% of Sri Lankan imports come from India, the largest share of imports into Sri Lanka, and India has consistently played a substantial role in the island’s history. Although that role has not always been favourable towards the Sri Lankan government as India has stood in support of the Tamil, a Hindu minority, against the majority Sinhalese. Meanwhile, another rising Asian power has begun to play a substantial role in the isle’s economic and political landscape. Second to India, 20% of Sri Lankan imports come from China. The Hambantota port was funded through Chinese loans and has been leased to China Merchants Port Holdings Company Limited (CM Port) at a 70% stake for 99 years, since 2017, in exchange for 1.12 billion USD. 

Tensions hence mounted and culminated between India and China as the Chinese vessel Yuang Wang 5 docked at the Hambantota port on 16 August 2022. Sri Lanka described its purpose as scientific, although India remained cautious. Yuang Wang class ships are built for research and surveying purposes. Due to these abilities, the Yuan Wang 5 has been called by India a ‘spy ship’. Although the vessel only stayed a few days, its aerial reach of 750 km meant it had the capacity to survey several ports in the Kerala region of India. Hence, although no action was taken, tensions did rise high.

Sri Lanka Today

For Sri Lanka, being tied down in geopolitical rivalries is less than ideal. The new government is preoccupied with the upcoming presidential and parliamentary elections, taking place in 2024 and 2025 respectively. Their proper execution is necessary in order for results to be recognised and respected domestically as well as internationally, so that they may ensure stability. Current president Ranil Wickremesinghe is eligible for another term although he may struggle to gather the required votes as he did not gain power through universal suffrage but instead through the resignation of his predecessor, Gotabaya Rajapaksa, and his election via Parliament. 

On the development front, consumer inflation went from 10.8% in June 2023 to 4.6% in July 2023. Furthermore, on 20 March 2023, Sri Lanka was able to secure an agreement with the IMF for 3 billion USD in economic support. This has helped the island move forward although the economic, political, and geopolitical contexts remain difficult as it still has to recover from a poverty rate which reached 25% in 2022

A potential role for Europe

Sri Lanka, being stuck between India and China, could use an alternative partner, one in the shape of the EU. Official diplomatic relations between the two opened in 1962 and have since been governed through their 19 April 1995 Cooperation Agreement. Yet, in 1995, the European Union’s integration process was still shaping up, while Sri Lanka remained wrapped up in a state of civil war. Relations between the two (as well as their internal situations) have greatly progressed since then. The EU imported 3.31 billion USD worth of goods from the island in 2022  and exported 1.06 billion USD’ worth back. Furthermore, Sri Lanka now also benefits from the EU’s Generalised Scheme of Preference (GSP+) program. This serves as an incentive for sustainable development, trade, and better governance. 6200 tariffs out of 7100 are covered by it. Moreover, around 760 million EUR have already been provided by the EU in assistance towards natural disasters, socio-economic programs, and conflict-affected people. This preferential treatment is not minor and clearly helps to advance Sri Lankan trade with the EU and its overall development. 

Yet, when the joint commission – composed of Sri Lanka’s foreign minister and the Asia-Pacific wing of the EU’s External Action Service –  meets next, ensuring the functioning of the 1995 agreement, it will have much to do to renew relations and support the islands’ convalescence. As Sri Lanka becomes a crux of rivalries in the region, the EU should not only step up its engagement in ensuring stability but also increase its role from that of a contributor to that of an essential partner and alternative between other foreign powers. Measures to be considered are not merely further aid but structural economic cooperation incentives and capacity building so as to pull the island out of poverty. Moreover, initiating negotiations towards a free trade agreement would demonstrate the will to form a more equal and substantial partnership, above that established by the GSP+. This in turn will demonstrate relations on equal footing. As such, the EU will become a powerful asset to Sri Lanka.

Implementing the European Indo-Pacific Strategy

However, an essential question to ask is why would Sri Lanka choose the EU above India, China, the US, or even the UK and Russia? Sri Lanka is in dire need of a reliable and committed partner that will not show any ambiguity in its support and will not partake in bias between ethnicities or factions. What can Europe offer that others cannot? 

Considering this through the lens of Indo-Pacific presence and engagement, Europe can benefit from Sri Lanka as an opening towards the wider region. This in turn would allow the EU to exercise its Indo-Pacific Strategy more actively. Ursula von der Leyen, European Commission President, recently visited the Philippines between 31 July and 1 August  2023. There she and her counterpart discussed not only trade but also security relations. Sri Lanka can be the bridgehead towards becoming a noteworthy actor within the region and strengthening those security relations across the Indo-Pacific. 

Through Brexit, the EU is no longer influenced by the Tamil diaspora that resides in the UK, of which there are around 250 000. As such, it can step in from a more neutral footing, away from ethnic rivalries, and focus on underlying issues. For Sri Lanka, if Europe can offer this unambiguous and serious partnership, then it may see Europe as the clear choice going forward, offering incentives for partnerships with European businesses and investment. For Europe this will not only help Sri Lanka develop and stabilise, but also open up new potentialities within its Indo-Pacific strategy, allowing for a more bold and present EU in a region described as “the most strategically important region on Earth”. 

Author: Laszlo de Bellescize, EIAS Junior Researcher

Photo credits: Pexels