China Overtakes India as Sri Lanka’s Largest Trading Partner

COLOMBO: India, which has been Sri Lanka’s single largest trading partner for decades, has now yielded that place to China, points out Dr.Muttukrishna Sarvananthan, a Sri Lankan economist based in Jaffna.

The significant change took place in 2016, he says in his latest paper. Sarvananthan attributes it to massive imports from China for the Chinese-funded infrastructure projects. However, India is still a close second, he adds.

The total value of trade between Sri Lanka and China amounted to USD 4,426 (imports from China $4,215 million + exports to China $211 million) in 2016. In the same period, the total value of trade between Sri Lanka and India was USD 4,369 million (imports from India $3,815 million + exports to India $554 million).

As a corollary, Sri Lanka's trade “deficit” with China is the single largest; amounting to USD 4,004 million in 2016, followed by with India amounting to USD 3,261 million in 2016.

The trade deficit of Sri Lanka with China is expected to continue to rise in the next decade and beyond because of large scale public investments by the Chinese state-owned companies such as the China Harbour Engineering Company Ltd (CHEC), China State Construction Engineering Corporation (CSCEC).

The CHEC is financing and undertaking the construction of the Colombo International Financial City/Centre (CIFC, which was formerly known as the Colombo Port City) by reclaiming land (269 hectares or 660 acres) from the sea by the southern side of the Colombo port.

This is the single largest Foreign Direct Investment (FDI) Sri Lanka has ever received. This mega infrastructure project is expected to cost about US$ 1.4 billion US dollars and expected to attract US$ 13 billion worth of investments over the 30-year period of the project cycle.

The bulk of the machinery, hardware, and raw materials for the aforementioned mega projects are imported from China. Moreover, substantial number of technical, skilled, and unskilled labor for these projects are also from China.

A total of US$ 3.75 billion worth of loans have been disbursed by China to Sri Lanka between 2010 and 2014. China has hardly given grants to Sri Lanka, to date.

Similarly, imports from India include goods imported for the Government of India-funded infrastructure and other projects across the country. India has provided total grants worth over US$ 200 million between 2010 and 2014 and over US$ 1 billion as loans between 2005 and 2014.

Roughly around 70% of Indian aid to Sri Lanka are loans and around 30% outright grants in recent years (2010-2016). The former are repayable but the latter are not.

Accordingly, India is the third largest destination for Sri Lanka's exports accounting for five-year average of 5.6% of Sri Lanka's total exports between 2012 and 2016. The United States of America was the largest destination accounting for almost 25.0% (average) for the period 2012-2016.

The United Kingdom is the second largest destination for Sri Lanka's exports accounting for about 10% of the total exports of Sri Lanka during 2012-2016.

China accounts for just 1.8% of the total exports of Sri Lanka during 2012-2016 (tenth largest destination).

China has emerged as the single largest source of imports to Sri Lanka in 2016 accounting for 21.7% of the total imports of Sri Lanka worth US$ 4,215 million. On average for the five-year period 2012-2016, annual imports from China amounted to USD 3,408 million accounting for almost 18% of the total imports of Sri Lanka.

India was the single largest source of imports to Sri Lanka during the five-year period between 2012 and 2016, averaging USD 3,783 million per annum accounting for almost 20% of the total imports of Sri Lanka.

But in 2016 India was relegated to the second position (after China) in terms of the source of imports accounting for 19.7% of the total imports of Sri Lanka amounting to US$ 3,815 million.

Singapore (averaging USD 1,373 million per annum between 2012 and 2016), UAE (averaging USD 1,298 million per annum between 2012 and 2016), and Japan (averaging USD 900 million per annum between 2012 and 2016) are the other three largest sources of imports into Sri Lanka.

Sri Lanka has had trade deficit with India ever since independence. It has been increasing in absolute terms since 1977. The ever-growing trade deficit with India has been an irritant in Indo-Lanka relations in the same way as India's relations with other South Asian countries.

Studies on Indo-Lanka trade have shown that India is the main/major source of goods that are imported to Sri Lanka because it is more competitive (least cost) than other sources.

“While too much noise is being made by certain businesses and, of course, certain politicians about the growing trade deficit with India (China could be also bashed in the not so distant future), there is not much discussion about the imports from Singapore and the United Arab Emirates (UAE).”

Singapore has been the second largest source of imports after India for a long period of time. However, the rapidly growing imports from UAE is only about a decade long with the ascendancy of the Rajapaksa regime in 2005.

To begin with, Singapore and UAE are not producers of the items imported into Sri Lanka. But many importers in Sri Lanka source their imports from Singapore and UAE because bulk of the black monies of Sri Lankan businesses, rich individual citizens, and of course politicians is stashed away in secure bank accounts in these two countries.

It is these black monies that are whitened for the import trade into Sri Lanka.

“Therefore, businesses and politicians in Sri Lanka instead of crying foul about the growing trade deficit with India (and China), should request the government to investigate the sources of financing of the ever growing imports from Singapore and the UAE, which would pay rich dividends towards combating corrupting and taming the black economy of Sri Lanka and their inextricable entanglement with the governance of this country,” Dr. Saravananthan said.

According to the latest official figures, of the total FDI coming into Sri Lanka from China (including Hong Kong) accounted for around 35% to date, while India accounts for 16.4%, and Singapore is 9.3%.”

The statement said the Board Of Investment expects FDI for the full year 2017 to total US$ 1.36 billion.