China or the West - who is really to blame for Sri Lanka's debt trap?

Created: 07/13/2022, 12:48 p.m

From: China.Table

People wait in line to buy cooking gas in Sri Lanka's capital, Colombo.

© Eranga Jayawardena/dpa

The President has fled, the economy is on the ground: The situation in Sri Lanka is dramatic.

China's role in the drama is less clear-cut than many think.

• The situation in Sri Lanka is delicate.

  The country is in the deepest economic crisis in its history, the president fled to the Maldives.

• But who is to blame for this situation?

  Many point to China.

  In their view, it is a prime example of China's alleged debt trap.

  But is that really true?

• This article is

  available to IPPEN.MEDIA

   as part of a cooperation with the 

  China.Table Professional Briefing -

  China.Table

   first published it 

   on July 12, 2022.

Hambantota/Beijing – Sri Lanka is in the midst of the greatest economic crisis in its history: the island nation has more than 50 billion US dollars in foreign debt and inflation is around 60 percent.

Insurgents stormed the presidential palace at the weekend, and a few days later President Gotabaya Rajapaksa fled to the Maldives with his wife and a bodyguard.

When it comes to Sri Lanka's debt, many immediately think of China.

To be more precise: the supposed Chinese debt trap into which Beijing is driving the countries of the “Belt and Road Initiative” (also known as the “New Silk Road”) – “Chinese neocolonialism”, as it is called in Washington.

President Rajapaksa and Prime Minister Ranil Wickremesinghe have indeed had close ties with China for a long time.

Now they have to be accused of being ripped off by China.

A prime example of the Beijing debt trap is Hambantota, Sri Lanka's second largest but newest deep sea port.

The port is on the most important shipping route between Europe and Asia and is also of military interest.

So far, so right.

But if you take a closer look at the allegation of a debt trap, it quickly turns out to be a geopolitical saga.

It reads as follows: Beijing loaned Sri Lanka money for a new port at high interest rates, which basically cannot become profitable, only to finally force Sri Lanka to give China the strategically important port on India's doorstep for 99 years left - because that was the guarantee for the original loan.

However, the story of China as a loan shark has a fundamental problem: it is not true.

This is proven by the latest research conducted by the top US university Johns Hopkins during the economic crisis: "It's a lie, and a powerful one at that," says Professor Deborah Brautigam, summarizing the results in a way that is both succinct and provocative.

They were even recently published as a large piece in

magazine, one of the most renowned American magazines.

China and the Port of Hambantota: A Geopolitical Saga

The feasibility study on which the expansion of the port is based was not financed by Beijing, but 75 percent by the Canadian government, prepared by SNC-Lavalin, one of Canada's leading construction companies, for 1.5 million US dollars.

The result: the port is economically viable if an international consortium builds it in a joint venture, operates it and later hands it over.

Accordingly, Colombo does not have to bear the investment costs of 1.7 billion US dollars alone.

A second study by the renowned Danish consulting firm Ramboll, which implements many EU projects, comes to the same conclusion.

The port of Hambantota is considered a prime example of China's debt policy in Sri Lanka.

© Liu Hongru/Xinhua/Imago

The government of Sri Lanka advertised the project with these studies in Canada, the USA and India, but showed no interest there.

Nobody from the EU either.

The political situation after 30 years of civil war and a tsunami was (and is) simply too risky for investors.

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The only ones who didn't shy away from entrepreneurial risk were the Chinese.

China Exim Bank offered Sri Lanka a $307 million 15-year loan with a choice of a 6.3 percent fixed rate or flexible rates.

The government chose the second, riskier option.

An international bond issued by Colombo at the same time shows that Beijing's interest rates are reasonable: Sri Lanka has to offer an interest rate of 8.3 percent in order to be able to borrow money on the international market.

China's role in Sri Lanka's economic crisis

However, the Sri Lankan government decided to run the port itself.

In 2010 it was officially opened.

But it quickly became clear that this would not work.

What's more, instead of waiting until the first phase became profitable, as the Western consultants had suggested, Colombo also had the second expansion stage built in 2012 - with a new USD 757 million loan at only two percent.

After the global financial crisis, interest rates fell.

In 2016, when the port was still under-profit, Colombo asked the China Harbor and Merchants Group to operate the port for 35 years, since they are already successfully managing the capital's port.

But before Chinese operators could get a foothold, Sri Lanka was so heavily indebted that growth eventually collapsed altogether.

However, the Chinese only play a marginal role in this debt, with a share of ten percent.

"Sri Lanka has higher debts to Japan, the World Bank or the Asian Development Bank ADB than to China," concluded Brautigam in her study.

Sri Lanka has most of its debts on the private international capital market anyway, where it was unable to repay around 4.3 billion dollars in 2017.

Sri Lanka's economy has collapsed completely

Following the advice of the International Monetary Fund (IMF), Colombo then tried to privatize the port internationally in order to get US dollars.

But only two Chinese companies were interested in the worldwide bidding process.

For US$1.12 billion, China Merchants got 70 percent of the port for 99 years.

But even this feat fizzled out.

An attack in 2019 in which more than 200 people died, and the corona pandemic in the two following years finally finished Sri Lanka's economy. "Our economy has completely collapsed," Prime Minister Ranil Wickremesinghe recently had to admit before parliament.

Inflation in Sri Lanka is over 60 percent.

Food prices have risen by more than 80 percent.

And due to a shortage of foreign exchange, the country is unable to import enough fuel.

newspaper summarizes

the development.

China has become cautious

But in the meantime China has also become cautious.

So cautious, in fact, that Sri Lanka's President Gotabaya Rajapaksa complained to Bloomberg that Beijing was denying his country substantial aid.

In addition, Sri Lanka could not access promised China loans of 1.5 billion US dollars.

And when we asked for a $1 billion aid package, there was no response at all.

Rajapaksa, of course, knows which narrative works well internationally: first gutted by China, then abandoned in the worst of the crisis.

But that didn't help him.

Because Beijing knows that the president will not stay in power and is now limiting its aid to humanitarian measures.

10,000 tons of rice are sent to Sri Lanka, as well as medicines.

And two new harbor cranes were delivered as planned at the end of June.

But negotiations on the long-pending free trade agreement between China and Sri Lanka have stalled.

Above all, Beijing hopes that Sri Lanka can manage without the US-dominated International Monetary Fund.

And while Beijing has grown dovish, India is trying to improve its position in Sri Lanka.

Delhi has lent $376 million this year alone - making it the year's largest lender.

By comparison, last year it was just $13 million.

At the recent Quad Summit - the meeting of the major Asian democracies India, Japan and Australia with the US - Delhi lobbied for the International Monetary Fund to agree to a rescue of Sri Lanka.

But with a new government in Colombo, the power game between India and China over Sri Lanka is open again.

By Frank Sieren

The China specialist and bestselling author

has lived in Beijing since 1994.

He has already worked as a correspondent for

and

.

He has been writing for the

since 2021 .

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