It is common knowledge that Sri Lanka’s borrowing from China, while significant, is not the main cause of its debt crisis. The country’s largest foreign lending source was international sovereign bonds(ISBs), accounting for 36.5% at the end of 2021. These bonds constituted an even greater share of Sri Lanka’s 2021 foreign debt repayments: 47% compared with China’s 20%- which includes loans for state-owned enterprises and other government-backed financing.
But China was Sri Lanka’s biggest bilateral creditor. China may not have caused Sri Lanka’s debt crisis, but recent moves in the Indian Ocean show how it benefits from lopsided lending. For e.g in 2017, Sri Lanka no longer appeared to be able to repay the construction costs of the Hambantota port in the south of the country, and was forced to hand over the lease to operate the port to a China–Sri Lanka joint venture for 99 years. Many saw this as a classic example of Chinese debt-trap diplomacy.
"The Rajapaksa administrations cultivated close relations with China beginning in the mid-2000s, which led to numerous infrastructure projects being implemented by China. Between 1971 and 2012, China provided some $50 million in aid and loans to Sri Lanka, 94% of which came after Mahinda Rajapaksa became president in 2005. Only 2% of this figure was in the form of grants, while the rest consisted of concessional loans. Construction of the Hambantota Port then began in 2007, and both the Mattala Rajapaksa International Airport and Colombo South Container Terminal were completed in 2013."
Many have noted the strong ties between China and the Rajapaksa administrations underpinning these projects and have questioned their necessity, given that the facilities built have not been fully utilized. …….."The projects dubbed “white elephants” have been almost exclusively funded by China. Moreover, Chinese-funded projects in Sri Lanka have been accompanied by a troubling lack of transparency which stands in contrast to, for example, Japanese-funded projects where the terms are publicly disclosed and costs are challenged by the media."
It reminds us of our own Metro Express project. Since 2016, India has injected US$ 952 million, or Rs 43.2 billion in the form of a line of credit and donations. This sum includes US$ 325 million (some Rs 14.7 billion announced by Nandini Singla, High Commissioner of India to Mauritius, during a function organized by India at the occasion of the 75th anniversary of its independence. This money will be used to finance the useless extension of Metro Express to the Réduit/ St-Pierre/ Côte-d’Or route. We are opening the doors to India’s debt trap diplomacy.
We are presently facing a similar situation as in Sri Lanka . Interestingly, the Sri Lankan government had initially tried to maintain the value of the Sri Lankan rupee despite the rapid depletion of foreign exchange reserves. Then , the central bank stopped buying the rupee . The exchange rate quickly dropped to 255 rupees to the dollar and continued its fall to over 350 rupees and Sri Lanka continued issuing ISBs, and by 2021 the majority of its external debt was sourced from international financial markets.
Instead of fixing the economy, as suggested by our talented contributor Sameer Sharma, “by recapping the BoM, tightening monetary policy and getting short term rates close to repo at 4% … engaging in fiscal consolidation and cutting wasteful spending while engaging in meaningful structural reforms “, this incompetent regime will prefer to kick the can down the road , at the most, till June next year and before the economic situation worsens any further , they will be announcing the general elections .
As I pointed out in my earlier article, meanwhile they will be having recourse to exceptional foreign financing to loosen the pressures on the exchange rate. And India will come in handy especially in the context of Modi’s coming visit !
And as Sri Lanka, we will be falling into India’s debt trap diplomacy - an economic dependency that will have its real costs , yet to be seen.(if not already, in terms of our national sovereignty over Agalega)
