Sri Lanka is passing through a severe economic crisis, the likes of which few countries in the world have seen. The crisis is such that the people of the country lack even the basic necessities like fuel, electricity and food for daily living.
While some would say that Sri Lanka’s crisis is a mess of its own making, the reality is somewhat different. By the end of 2021, Sri Lanka owed China US$7.4 billion, accounting for 19.6 percent of its debt. And because China, the island nation’s largest bilateral creditor, holds a substantial portion of Sri Lankan debt, the “Chinese debt trap” narrative is back in the spotlight. With the ongoing crisis, Sri Lanka will be hard pressed to make the interest payments to China with no hope of paying back the principal anytime soon.
What is happening in Sri Lanka and how did it happen?
Simply put, Sri Lanka’s economy is in tatters. Years of mismanagement by the country’s ruling elite and Mahinda Rajapaksa’s insistence on not turning to the International Monetary Fund (IMF) have added to Sri Lanka’s economic woes.
Sri Lanka is currently battling hyperinflation, budget and account deficits, an undervalued currency and a ballooning foreign debt that can no longer be repaid. Following the 2009 civil war, the country (or rather its ruling political elite) took on massive debt to help with war expenses and to undertake excessive, unnecessary and costly infrastructure projects that had little practical effect or Return was expected.
The COVID-19 pandemic devastated Sri Lanka’s tourism, which was the country’s main source of foreign exchange. Currently, the country must work with international institutions to help restructure its debt to China and other lenders.
China’s debt on Sri Lanka
The story of China’s loan to Sri Lanka is a long and complicated one. The story of Sri Lanka falling into the Chinese debt trap has come to the fore several times over the years.
Sri Lanka handed over a national asset, a newly renovated port, to China in 2017 on a 99-year lease in exchange for China paying off the debt Sri Lanka had taken out to build the port in the first place. The Hambantota International Port project was a politically motivated infrastructure project started in the home district of the Rajapaksa family, who led the government of Sri Lanka from 2005–2014 and 2019–2022.
From the outset, there was much criticism regarding the construction of the port, and money was being poured into a project that might not produce sufficient returns. At the time construction of the port began, Sri Lanka already had a functioning port in Colombo located on a major global shipping lane and, therefore, had substantial traffic.
The new port is linked to Mahinda Rajapaksa’s legacy and an economic one for Sri Lanka. Its economic success was enough to ensure his re-election for a third presidential term. This caused the Sri Lankan government to go ahead and speed up the construction and launch of the Hambantota port, ignoring the advice and recommendations of all feasibility studies.
However, the port construction did not help Rajapaksa as he lost the presidential election in 2015 and thus, Maithripala Sirisena and a new cabinet were appointed. It was the new government which realized its inability to repay the loan taken from China for the port and signed a lease agreement with China Merchant Port in December 2016. The agreement will allow Sri Lanka to reduce port losses, while developing it without taking on more public sector debt.
According to the then President Ranil Wickremesinghe, the leasing of the Hambantota port to China greatly helped the country in improving its financial condition. If not for the lease, Sri Lanka’s debt would exceed the current US$1 billion. Another point to be noted is that apart from the port being leased to China for 99 years, 800 hectares of industrial area around the port was also included in the agreement.
Debt Restructuring and China’s Role
The only opportunity for Sri Lanka at this stage of its financial crisis is to focus on debt restructuring and China will play a major role in this regard. Chexim Bank and China Development Bank are among Sri Lanka’s largest individual creditors with US$4.1 billion and US$3 billion respectively.
The debt relief that China is willing to provide to Sri Lanka through these two banks is significant. Based on the history of China’s debt restructuring with other countries, it is clear that this process will take time.
A closer look will reveal that several factors led to Sri Lanka’s ongoing economic crisis, but it is also an undeniable fact that China, which lent Sri Lanka huge sums of money at exorbitant interest rates, played a major role in its present plight Is. In addition to the Hambantota port, which has already been leased to Chinese entities, other projects are being undertaken in Sri Lanka that are financed by Chinese loans, such as the Colombo Port City, which was unveiled by Chinese President Xi Jinping in 2014. Was.
Experts have claimed that this new port city will be the next Hambantota, meaning that Sri Lanka will have to lease the city to China to manage its debt. And now, at this juncture, it is completely dependent on China and its whims for its revival.
The Sri Lankan example is a stark reminder of the consequences of borrowing from China. A great example of this would be the Train to Nowhere, a US$1.5 billion stretch of track financed and built by China to connect Kenya’s port city of Mombasa to the Ugandan border. The track has failed to make a profit and has shown poor performance.
Kenya is also following Sri Lanka’s footsteps, unfortunately, and the country borrowed US$9.8 billion from China between 2006 and 2017. And it is still the third largest recipient of Chinese loans in Africa. Sri Lanka’s economy has already collapsed and will rely heavily on Chinese goodwill and help from outside factors if it hopes to recover.
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