Infrastructure and connectivity projects in Sri Lanka have attracted enormous global attention. It is a lower middle-income country with a population of a little over 22 million and has received financial and technical support from a number of countries to build roads, ports, railway line, power plant and several other socio-economic growth projects to meet the 2030 Sustainable Development Goals. However, the foreign assistance/grants/loans for infrastructure projects have been a mixed bag of successes and failures and these have impacted on domestic political stability in Sri Lanka.

After a very difficult year marked by high inflation, power cuts, fuel and food shortages and public demonstrations, 2023 has looked good for Sri Lanka except that “GDP is projected to contract by roughly 3 percent in 2023 before returning to positive growth in 2024”. However, the Board of Investment (BoI) notes that the country managed to raise its FDI (March 2023) by 38% to $1.08 billion.

Among the major investors in Sri Lanka, China is at the top of the pack accounting for nearly US$ 3 billion which corresponds to nearly a quarter of total Foreign Direct Investment (FDI). While that is quite impressive, the Chinese investments have attracted adverse reputation. In particular, the Hambantota port have been in the cross hair and the Sri Lankan government had to lease it to China for 99 years. China has also not been willing to take ‘haircut’ over the loan defaults, and in November 2023 it agreed to extend the period as also lower interest rates of its loans.

Unlike China, India appears to have made good progress. Also, leaders in both countries recognize the need to build connectivity by land, sea and air for economic integration. In September 2023 New Delhi announced that it had completed projects worth over US$ 1 billion with five Indian Lines of Credits. The expansion of the Colombo port's west container terminal by India's Adani Group has been underwritten by a US$ 550 million commercial loan from the US International Development Finance Corporation.

The Setu Samudram Canal project had been languishing for several decades but appears to have gained urgency in recent times; plans envisage building a land bridge including an energy pipeline. This 27 kilometers long bridge would connect Rameswaram in India with Talai Mannar in Sri Lanka given that the depth of sea along this alignment is “conducive as there is only one to three meters of water and a bridge could be easily constructed in the region”. There have even been talks about building an underwater tunnel between the two countries; however these projects have not received any firm financial commitments by any of the governments.

While China and India are new comers, Japan has been actively supporting Sri Lanka for decades to build infrastructure and contributed immensely to Sri Lanka’s economic growth. Overall, the Japanese support has been a successful venture, barring an instance in 2020 when President Gotabaya Rajapaksa unilaterally announced that the US$ 2.2 billion Japan International Cooperation Agency (JICA) funded Light Rail Transit project is not a “priority for the government”, However, in 2023, the Sri Lankan government decided that the project be restored. Japan is now considering investments in sectors such as power generation, ports, highways, investment parks, and digital infrastructure. Japan may even consider more attractive propositions to Sri Lanka as an alternative to China and India given that both are competing to woo Sri Lanka through attractive investment offers.

Not to be left behind as also encouraged by its commitment to build sustainable and resilient infrastructure in developing countries, the United States has announced that it will invest US$ 553 million in private loans to build a deep-water container terminal in Port of Colombo (West Container Terminal). According to the U.S. International Development Finance Corporation, the project will potentially “transform Colombo into a world-class logistics hub at the intersection of major shipping routes and emerging markets,” and will “expand its shipping capacity, creating greater prosperity for Sri Lanka — without adding to sovereign debt — while at the same strengthening the position of our allies across the region,”

The above are good signs and economic growth in Sri Lanka is expected to rebound in 2024. The very fact that the country sits astride the international sea trade route, investments can be expected in port and shipping particularly in the transshipment sector. Being an agrarian economy, other than tea exports, not much can be expected from the industrial sector. Tourism is growth sector and investments in this sector would be rewarding.

However Sri Lanka would have to be careful not to get entangled in any geopolitical and geostrategic contestation. A sophisticated diplomacy would surely help Colombo overcome great power pressures particular from China and the US.

Dr. Vijay Sakhuja is associated with Kalinga International Foundation, New Delhi and is Emeritus Professor of Research, SoA Center for Integrated Maritime Studies and Research (SOACIMSR), Siksha 'O' Anusandhan University, Bhuvneshwar, Odisha, India.