One of the contributing factors to Colombo’s economic crisis is the extensive foreign debts secured for infrastructure projects. China accounts for nearly 10 per cent of that
Demonstrators hold placards and shout slogans during a protest against the surge in prices and shortage of fuel and other essential commodities near the parliament building in Colombo. AFP
Sri Lanka, the island nation, is struggling to stay afloat as it experiences its worst economic crisis — facing an acute foreign exchange shortage — since its independence in 1948. Lankans are suffering 13-hour-long power outages and having to pay through their nose for basic items, such as fruits and vegetables.
The anger of the Lankans has been palpable, as they have been taking to the streets to protest against the government, helmed by President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa.
Also read: Timeline | Sri Lanka’s economic crisis was in the making from November 2019
On Tuesday, food vendors in Colombo took out a protest, chanting slogans, “Sri Lankan government sold everything to China. Sri Lanka has no money as it has sold everything to China.”
Experts have noted that the Sri Lankan economic crisis is a perfect example of China’s debt-trap diplomacy. As Colombo struggles, here’s a look at what is this debt-trap diplomacy and Beijing’s role in the Lankan crisis.
Debt-trap diplomacy
In the recent past, there have been several articles and studies across the United States and Europe about China’s debt-trap diplomacy.
The term simply refers to offering projects/loans on terms that end up being too difficult for countries to repay, eventually compelling them to accept political or economic concessions.
A feature of debt-trap diplomacy is that it is often kept off government balance sheets, directed to state-owned companies and banks, joint ventures or private institutions, rather than directly from government to government.
Experts have noted that China has been using this strategy widely across Asia; several countries now owe China huge amounts of money through President Xi Jinping’s Belt and Road Initiative.
The Atlantic in a report, explained China’s debt-trap diplomacy succinctly: “Once a country is weighed down by Chinese loans, like a hapless gambler who borrows from the Mafia, it is Beijing’s puppet and in danger of losing a limb.”
Also read: Is it safe to travel to Sri Lanka? The economic crisis and its fallout on tourism
China’s debt-trap with Sri Lanka
One of the contributing factors to Sri Lanka’s economic crisis is that it has extensive foreign debts that it had secured for infrastructure projects.
According to a CNBCTV18 report, the country accrued a foreign debt of $35 billion in 2021. Reports state that China accounts for nearly 10 per cent of Sri Lanka’s total foreign debt in the form of concessionary loans.
One of the prime example of this debt-trap diplomacy in Sri Lanka is the Hambantota port in South Sri Lanka. Hambantota is the home of the Rajapaksa family President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa.
The billion-dollar project was funded by loans taken from Chinese lenders. However, it became mired in controversy, and struggled to prove viable, leaving Sri Lanka saddled with growing debts.
A news report published by the BBC states that finally in 2017, Sri Lanka agreed to give state-owned China Merchants a controlling 70 per cent stake in the port on a 99-year lease in return for further Chinese investment.
The situation has only become worst for Sri Lanka as China has refused to offer any concessions in debt repayment, as per a Hong Kong Post report. China reportedly refused to respond to Sri Lanka’s appeal to reschedule its huge debts, and its Ambassador to Sri Lanka said in March that his country was keener on considering a further $1 billion loans and $1.5 billion credit line.
The report added that the end result of reckless borrowing from China to finance unprofitable infrastructure projects was what had contributed to putting Sri Lanka in this unenviable position, to begin with.
Lessons for other countries
Experts have noted that the situation in Sri Lanka has made other nations wary about Chinese debts.
China is one of the world’s largest single creditor nations. Data reveals that its loans to lower and middle-income countries have tripled over the past decade, reaching $170 billion by the end of 2020.
A research by AidData, an international development body at William & Mary University in the US, said that there are more than 40 low and middle-income countries whose debt exposure to Chinese lenders is more than 10 per cent of the size of their annual economic output (GDP).
Countries such as Pakistan and Bangladesh need to negotiate carefully to avoid falling into a situation such as the one that Sri Lanka is battling currently.
With inputs from agencies
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