China’s funding and operation of Sri Lanka’s Hambantota port has been cited as a warning example of “debt trap diplomacy”, with some even blaming China for the island nation’s economic plunge.
But experts say Sri Lanka’s debt crisis is more complex and China is just one of them, though an important player.
why i wrote this
China may not have caused Sri Lanka’s debt crisis, but recent developments in the Indian Ocean show how unilateral lending can benefit Sri Lanka.
The country’s crisis stems largely from fiscal mismanagement, including persistent budget deficits and meager foreign exchange reserves. Still, China is Sri Lanka’s largest bilateral creditor, accounting for her 20% of Sri Lanka’s debt.
China, in particular, has loaned Sri Lanka $1.26 billion over several years to finance Hambantota Port, which is managed by a state-owned Chinese company. India is concerned about China’s use of the site for military purposes, a concern heightened by the recent docking of a Chinese missile-tracking vessel.
The incident shows that Sri Lanka must increasingly balance its ties with longtime ally India and major creditor China.
Political scientist Deborah Brautigam says, “India and China will go back and forth…in South Asia.” “A small country like Sri Lanka would be just a ping-pong ball.”
China’s financing and operation of Sri Lanka’s Hambantota port, where a Chinese missile tracker docked this week despite objections from the United States and India, was cited as a cautionary example of “debt trap diplomacy.” This is a state-financed strategy. It provides funding to small countries that may not be able to service their debts as a way to increase their geopolitical influence. Some even blame China for the island nation’s plummeting economy. But experts say Sri Lanka’s debt crisis is more complex, and although China is a key player, she is just one of them.
How did Chinese loans contribute to Sri Lanka’s debt crisis?
China is Sri Lanka’s largest bilateral creditor.
why i wrote this
China may not have caused Sri Lanka’s debt crisis, but recent developments in the Indian Ocean show how unilateral lending can benefit Sri Lanka.
As of the end of 2021, Sri Lanka’s total public and publicly guaranteed debt was $35.8 billion. data From Sri Lanka’s Ministry of Finance analyzed by researchers.
Nevertheless, experts say Sri Lanka’s borrowing from China, while important, is not the main cause of its debt crisis. Default recorded its first external debt in May. The country’s largest source of external lending is international sovereign debt, accounting for 36.5% at the end of 2021. These bonds account for an even larger share of Sri Lanka’s 2021 foreign debt service, at 47% compared to China’s 20%.
“The debt crisis is the result of Sri Lanka’s own poor financial management,” said Subhashini Abeysinghe, research director at Verite Research, an independent think tank in Colombo. The government’s inability to generate sufficient revenue, continued budget deficits, tax cuts, and meager foreign exchange reserves all contributed, she explains.
“Sri Lanka has refused to join the IMF. [International Monetary Fund] Or start discussions with lenders about debt restructuring. [was] too late,” she says.
What are the prospects for China’s debt restructuring in Sri Lanka?
China is playing a key role in helping Sri Lanka emerge from the crisis, experts say.
Deborah Brautigam, director of the China-Africa Studies Initiative at the Johns Hopkins School of Advanced International Studies, said based on past practice, the Chinese government is unlikely to write off the loans, but it is likely to extend the repayment period. says that there is China, which has taken risks with “excessive” loans to poor countries, has avoided disclosing details of restructuring deals to preserve bargaining power. “The Chinese, like other creditors, don’t want to mold what other countries get,” she says.
Moreover, she said such agreements are not popular in the country, especially given the country’s deepening debt problems.
Chinese financial institutions are in talks with Sri Lanka on “appropriate ways to handle maturing China-related debt,” foreign ministry spokesman Wang Wenbin said last month. However, no specific steps were revealed.
Nilanthi Samaranayake, Director of the Strategy and Policy Analysis Program at CNA, an independent research institute in Arlington, Virginia, said:
Sri Lanka President Ranil Wickremesinghe recommended Due to China’s recent agreement as part of the International Committee of Creditors to provide debt relief to Zambia. But he pointed out that many creditors want Sri Lanka to seek bailout from the International Monetary Fund first.
Is China using its economic power to gain strategic influence in Sri Lanka?
When the Chinese satellite and missile tracker Yuan Wang 5 docked at Sri Lanka’s Hambantota port this week, experts said Beijing was using its economic clout to gain control of the region, despite India’s objections. He said he showed he was growing in power.
Jeffrey Becker, director of the CNA’s Indo-Pacific Security Affairs Program, said the visit was “a sign of the continuing importance of the Indian Ocean to China’s strategic interests and the need to facilitate China’s global power projection.” It reflects the growing importance of China’s state-owned enterprises in China.” The dual-use craft will help China manage and track its civilian and military space assets, he said.
China loaned $1.26 billion to Sri Lanka Financing Hambantota Port From 2007 to 2014. As Sri Lanka’s debt grows, China Merchants Port Holdings, a state-owned Chinese company, has invested in the port under her $1.12 billion 99-year lease, which Sri Lanka has used to boost its foreign exchange reserves. took over the management of
India is concerned about China’s use of Hambantota port for military purposes. Sri Lanka postponed the visit for diplomatic talks and then allowed Yuan Wang 5 to dock on the condition that it would not conduct research in Sri Lankan waters. “Sri Lanka is trying to stay out of the China-India conflict,” says Dr Samara Nayake, noting that Sri Lanka has a tradition of welcoming foreign ships and the income they generate.
The incident shows that Sri Lanka must increasingly balance its ties with longtime ally India and major creditor China. “India and China go back and forth … in South Asia they impose smaller and weaker countries,” says Dr Brautigam. “A small country like Sri Lanka would be just a ping-pong ball.”