China's strategic expansion of its politico-economic influence in South Asia, a region of geopolitical importance, is evident through its multi-faceted engagement efforts to sustain foreign relations with local nations.[1] A key aspect of such engagement is a significant increase in development lending (and commitments for such lending) offered to South Asian countries as an alternative to conditional debt from international financial institutions. An observable characteristic of such lending is its far-reaching, multi-dimensional impact beyond the financial conditionalities and soft power pressures exerted through these loan schemes. Notable examples of such initiatives are a collective USD 24 billion lent to Bangladesh in 2016 to complete a series of twenty-seven development projects (such as a coastal disaster management initiative and the construction of the road tunnel under the Karnaphuli River), and the approximate Chinese debt bill of USD 1.4 billion for the construction of the China-Maldives (Inter Island) Friendship Bridge.[2] One facet of the multi-dimensional impact is China's reconceptualization of development aid and financing through its development lending, focusing on Other Official Flows (OOFs) as opposed to traditional Official Development Assistance (ODA).[3] This shift is reflected in the fact that, as of 2021, only a quarter of China's USD 80 billion development investment in South Asia comes from ODA channels.[4]

Such a reality has diluted the formalities—and by extension, the accountability—of development lending by making its conceptual and practical approach more transactional. Three more complex impacts of Chinese development aid to South Asia, are (a) shaping the choice patterns of politico-economic elites in the region; (b) influencing the boundaries of freedom provided to local media and the formation of public opinion; and (c) defining civil society and academic activism in South Asia.[5] Therefore,  it can be argued that Sino socio-economic development lending to South Asia—provided with the intention of China gaining an edge over competing powers such as the USA and India—has unofficial cascading impacts beyond the financial conditionalities of such lending.

Sri Lanka and Bhutan have emerged as prominent case studies exemplifying the varied impacts of Sino-development lending in South Asia. Although these two countries have markedly different foreign policy approaches, particularly in their engagement with China, the evolving Sino-Bhutanese relationship shares similarities with the early stages of post-independence Sri Lanka's bilateral engagement with China. To analyze the complex implications of Chinese development investment in South Asia, this commentary utilizes the aforementioned case studies to identify key lessons for Bhutan from Sino-Sri Lankan relations on the impact of socio-economic development lending to counter multidimensional poverty. To this end, the political commentary will first examine the relationships maintained by the two countries with China in East Asia. Then the write-up will draw parallels between the early stages of Sri Lanka and China’s bilateral lending, and Bhutan’s current foreign policy predicament to identify the main lessons for Bhutan from Sri Lanka.

The Tale of Two States: Bhutan’s Foreign Policy Predicament and Contemporary Sino-Sri Lankan Relations

To substantiate these lessons through comparative analysis, it is necessary to first contextualize Sri Lanka’s contemporary development lending dependency on China and the present state of evolving Sino-Bhutanese relations.

Since emerging from its three-decade civil war, Sri Lanka, one of the earliest vocal supporters of China’s Belt and Road Initiative (BRI), adopted a ‘borrowing (from China) to build’ approach for infrastructure construction as a means of driving economic development. Beijing became the country’s largest bilateral creditor for a string of large-scale projects [6], ranging from the construction of the controversial Nelum Tower which was opened to the public in September 2022 [7] to the USD 4.5 billion Sinopec oil refinery approved in December 2023. [8] Debt-driven financing for national development has become a crucial strategy for economic recovery in Global South countries like Sri Lanka. However, Sri Lanka’s declaration of its first sovereign default during the 2022 economic crisis, coupled with the debt-to-equity swap of the Hambantota Port, has sparked criticism among South Asian observers. Some question whether Sri Lanka has become a victim of China’s alleged debt-trap diplomacy. [9] It is argued that regardless of the perceived intentions behind China’s bilateral lending to Sri Lanka, Beijing remains the most influential state actor in the island’s macroeconomic management.

The Bhutanese Foreign Minister Tandi Dorji’s visit to Beijing in 2023 to further diplomatic talks on the disputed borders between the two countries is seen as a milestone in contemporary Sino-Bhutanese bilateral relations.[10] It marks a diversification of Thimphu’s active foreign politico-economic ties from a singular relationship with India as a regional power. The intricate dynamics of China’s geopolitical dominance which demands alignment from countries in the region, Bhutan’s pressing need for alternative socio-economic lending to address multi-dimensional poverty as a critical non-traditional security issue, and the country’s increasing interest in accessing global market opportunities with China’s support as a big power [11] are reflected in Bhutanese Prime Minister Dr. Lotay Tshering’s remarks during an interview with The Hindu: “Theoretically, how can Bhutan not have any bilateral relations with China? The question is when, and in what manner”. [12] It is, therefore, reasonable to anticipate that Sino-Bhutanese relations will evolve into an active socio-economic connection, strategically managed by Bhutan to obtain development lending from China—whether within or outside BRI—albeit in a manner that does not threaten or destabilize longstanding Indo-Bhutanese relations.

Key Lessons for Bhutan from Sri Lanka’s Socio-Economic Development Dependency on China

1. A notable parallel between Sino-Sri Lankan relations in the latter half of the 20th century and current Sino-Bhutanese ties is China's strategy of leveraging entry points beyond economic dependency to establish modern diplomatic relationships. Analyzing Sri Lanka’s post-independence foreign policy reveals diversification of diplomatic ties under the non-aligned movement [13] from Western (or West-aligned) partner countries of the colonial government, to countries like China as an emerging power. Sino-Sri Lankan relations which date back to the 5th Century AD were strengthened by the signing of the Rubber Rice Pact in 1952 for basic barter-based trading, and the adoption of the maritime agreement between China and Sri Lanka in 1963. [14] Large-scale socio-economic development lending and investment from China mainly began after the conclusion of the civil war with a preliminary signing of an investment facilitation agreement between the China Development Bank and the Central Bank of Sri Lanka in 2009. [15] This is evident in the significant rise in Foreign Direct Investment (FDI), with Chinese development investment accounting for 35% of the national total. [16] Hence, it can be seen that socio-economic development lending from China, with conditions of repayment and ‘debt to asset’ swaps, became the dominant characteristic of Sino-Sri Lankan relations decades after the establishment of their politico-cultural ties. [17] The evolution of Sri Lanka-China relations, which has recently fostered economic dependency on China, suggests that while the Sino-Bhutanese relation is predominantly politico-cultural, it could eventually evolve in a similar direction.

2. Another lesson from Sino-Sri Lankan ties that could offer valuable insights for Bhutan is the incorporation of strategically important land points as conditionalities in socio-economic development lending agreements. Clear examples of this reality are the transfer of the Hambantota Port and the surrounding 15,000 acres to China for 99 years, due to non-payment of the Hambantota Port Development Project loan, along with the national security decision to establish a naval unit at the port. [18] It is predicted that in the future, the Hambantota Port will be strategically utilized to position greater Chinese naval assets to the south of Sri Lanka which would provide Beijing a tactical maritime advantage over the Southern Indian Ocean.[19] In drawing a parallel to current Sino-Bhutanese relations, the establishment of the Chinese Pangda village in western Bhutan, about 2.5 km inland from the disputed boundary, the construction of new storage bunkers in the nearby mountains, and the newly built road connecting the village to inland Bhutan all suggest that Beijing has a strategic interest in Bhutan, which the country is actively exploring. [20] As the relationship between the two countries evolves to prioritize development lending, resolving existing border disputes in a way that favors China may become a condition in the negotiations and terms of development lending.

Conclusion

In conclusion, the evolution of China's development lending in South Asia illustrates the multifaceted impacts of its politico-economic strategies. The cases of Sri Lanka and Bhutan highlight how China's approach to foreign relations transcends traditional economic dependency, combining geopolitical strategy with socio-economic development. Sri Lanka's experience with Chinese lending, characterized by both infrastructure development and heightened debt dependency, underscores the strategic trade-offs and risks inherent in such engagements.

Navigating its evolving relationship with China offers Bhutan valuable lessons. Key takeaways from Sri Lanka’s experience include the importance of maintaining a balanced foreign policy, preserving sovereignty over strategically important territories, and carefully negotiating terms of development lending. As Bhutan seeks to diversify its diplomatic and economic ties, it must remain cautious of potential pitfalls while leveraging opportunities for growth. Ultimately, the trajectories of Sino-Sri Lankan and Sino-Bhutanese relations serve as critical case studies for understanding the broader implications of China's engagement in South Asia.