Colombo’s Debt is Beijing’s Delight
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Issue Net Edition | Date : 03 Sep , 2021

News reports of July 6, 2021, indicated that the debt default probability by Sri Lanka in one year was the steepest in Asia-Pacific; up from 13 percent about six months ago to 27.9 percent – overtaking Papua New Guinea, Kazakhstan, Mongolia, Pakistan, Malaysia and Indonesia. There were apprehensions how the government would cope with at least US$2.5 billion debt due in next six months with the economy hit be COVID-19.

In the above context, Ajith Nivard Cabraal, Sri Lanka’s State Minister for Money and Capital Markets said that arrangements were being put in place to settle the bonds through steps like foreign exchange controls and swap agreements with China and Bangladesh to meet debt maturities till the end of 2021. However, Sri Lanka has not spelt out how the foreign-currency debt-servicing needs for 2022 and beyond are to be met.

Given the economic uncertainty, some opposition members called for Sri Lanka to seek help from the International Monetary Fund (IMF) but the government does not want to do so though it could renegotiate terms for the US$1.5 billion fund facility that ended prematurely in 2020 amid changes in financing needs due to COVID-19. It may be recalled that in 2016, the IMF had refused Sri Lanka the last installment of another US$1.5 billion loan citing the government’s failure to reduce the fiscal deficit to 3.5 percent of gross domestic product (GDP).

In March this year, Sri Lanka signed a three-year US$1.5 billion (Yuan 10 billion) currency swap deal with China to further promote trade and investments. China is Sri Lanka’s largest source of imports; in 2020 imports from China amounted to US$3.6 billion – 22 percent of total imports by Sri Lanka. The currency swaps allow central banks to ensure banks in their countries can borrow ready cash in any currencies. China also gave a US$500 million loan to Sri Lanka this year, in addition US$500 million loan granted in October 2020.  

In May 2021, media reported that Bangladesh had cleared a currency swap deal with Sri Lanka. The report quoted  Mohammad Islam, spokesman for Bangladesh stating, “The Board of the Bangladesh Bank has decided, in principle, to lend $200-250 million from Bangladesh’s reserves to Sri Lanka for three months.” Interestingly in April 2021, Bangladesh’s foreign reserves hit a record high by crossing US$ 45 billion.  India had extended a US$400 million currency swap to Sri Lanka last year.

China Harbor’s US1.4 billion investment in Sri Lanka during September 2020 marks the first of a US$13 billion plan to develop Colombo Port City into a world-class financial and trade center. Beijing’s debt-trapping of Sri Lanka commenced with forcing it to give Hambantota Port to China for 99 years. Hambantota is part of Beijing’s plan for a line of ports stretching from Chinese waters to the Persian Gulf. China has also agreed to provide a US$ 989 million loan to Sri Lanka to build an expressway that will connect its tea-growing central region to the Chinese-run seaport.

By 2015 China had given Official Development Assistance (ODA) and Foreign Direct Investment (FDI) to Sri Lanka of about US$15 billion; most of the ODA in loans and grants (US$12 billion) in sectors like energy, infrastructure and services. The private Chinese investment by 2015 was US$3 billion. Overall Chinese investments and assistance to Sri Lanka have grown more beyond 2015. But economic clout is not the only means that China uses to debt trap a country.

China’s political warfare plays an as important role, in which the main goal is to capture the political apex of the target country.  China expanded its footprint in Sri Lanka during the leadership of former president Mahinda Rajapaksa, the older brother of the current prime minister. But having Sri Lanka already gratified because of China’s loans, grants and investments, Beijing sees an added opportunity with the Gotabaya clan expanding its hold in the Sri Lankan government.  

President Gotabaya Rajapakse recently appointed his younger brother Basil Rajapakse as Finance Minister. Basil Rajapakse, who was sworn in as a member of parliament on July 8 and took over as Minister of Finance from Prime Minister Mahinda Rajapaksa (his older brother). Basil is the national organizer of the ruling Sri Lanka Podujana Peramuna (People’s Party) and the fifth Rajapakse brother in the cabinet. He controls Sri Lanka’s important institutions, including the Treasury and Central Bank.

There is speculation among members of the People’s Party that Basil will run for president in the next presidential election although President Gotabaya Rajapakse hinted at running for a second term himself when  speaking to heads of state-run and local media houses on his priorities he said he would have five more years to achieve his goals.

According to the World Bank, Sri Lanka’s share of poor rose to 11.7 percent during 2020, lower-middle-income poverty line being US$3.2 per day. There is significant fall in per capita GDP to US$3,682 from an average of US$3,005 during 2017-2019. On August 31, 2021, President Rajapaksa declared an economic emergency to contain soaring inflation after steep fall in Sri Lankan currency spiked food prices; promulgating emergency regulations under the Public Service Ordinance on the supply of essential goods.

Sri Lanka has appointed a former army General as Commissioner of Essential Services with power to seize food stocks held by traders and retailers and regulate their prices. Sri Lanka’s economic condition means increased dependence on China; nothing could gladden China’s Communist Party (CCP) more.

Given Sri Lanka’s geostrategic location, it is more than expected that China will go all guns blazing to draw Colombo deeper into its strategic sphere. But the major concern is that China wants Sri Lanka to be part of its policy of encircling India. Having made deep inroads in Sri Lanka, China is now focusing on Northern Sri Lanka in order to influence the ethnic Tamils in the region.

In February this year, the Gotabaya Rajapasa government decided to award the US$12 million hybrid wind and solar energy project to the Chinese Sinosar-Etechwin joint venture in three islets off the Jaffna Peninsula which are barely 50 km from Tamil Nadu. According to reports, another Chinese joint venture has been allotted land in a coastal village in northern Sri Lanka for farming cucumber fish despite protests by local farmers.  

With Pakistan sitting in its lap, China is developing the China-Myanmar Economic Corridor on lines of the China-Pakistan Economic Corridor in Pakistan. The first shipments through the railway line from the Myanmar to Chengdu in western China were recently delivered, signaling China’s new road-rail transportation channel to the Indian Ocean. With its eye on the Indian Ocean, China has been forging maritime links with Myanmar, Bangladesh, Seychelles, Mauritius and Maldives in addition to Sri Lanka. It already has Pakistan’s entire coastline at its disposal.

China was behind the bloody Maoist insurgency in Nepal which is old news. More recent is the decades old China-Pakistan support to Taliban which has resulted in the ignoble retreat of the US from Afghanistan. The China-Pakistan nexus in conjunction Pakistan-based and other terrorist organizations have developed deep links with radical and terrorist organizations in Myanmar, Bangladesh, Nepal, India and Maldives. It is in the same context that China is focusing on the ethnic Tamil population in Northern Sri Lanka – to wage sub-conventional war in Southern India; despite China and Pakistan having helped Sri Lanka to decimate the LTTE.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Lt Gen Prakash Katoch

is Former Director General of Information Systems and A Special Forces Veteran, Indian Army.

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One thought on “Colombo’s Debt is Beijing’s Delight

  1. Informative and very well written article : basically it is China all around and is posing a real threat now in near future. And yes Rajapakse clan seems enjoying the Chinese lap and in return sacrificing their country’s interests. India need a strong and shrewd leader to face the challenges

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