Sri Lanka succumbs to China's debt-trap diplomacy: Report
September 26, 2023
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Sri Lanka succumbs to China’s debt-trap diplomacy: Report

According to some reports, Fitch downgraded Sri Lanka's credit rating last month owing to fears about the country's USD 26 billion foreign debt being defaulted on.

by WEB DESK
Apr 12, 2022, 05:30 pm IST
in World
Representative Image (Photo Source: ANI)

Representative Image (Photo Source: ANI)

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Colombo [Sri Lanka]: Sri Lanka, a thriving island country with a population of 22 million, has succumbed to China’s debt-trap diplomacy while Colombo battles the most significant economic crisis in decades amid mounting debt repayment woes.

China has turned a blind eye after trapping the island country into a financial trap.

Sri Lanka is now experiencing its greatest economic crisis since obtaining independence from the British in 1948. The slump is blamed on currency shortages caused by the travel ban imposed during the COVID-19 epidemic. This has resulted in the nation’s inability to purchase sufficient fuel, resulting in an extreme shortage of food and essential commodities such as heating fuel and gas.

Sri Lanka appears to be on the edge of a “humanitarian crisis,” according to the United Nations Development Programme; as its financial troubles grow, food prices rise, and the country’s coffers run dry. According to World Bank estimates, five lakh people in Sri Lanka have fallen into poverty since the outbreak began, a “huge setback similar to five years’ worth of growth,” according to the bank.

According to some reports, Fitch downgraded Sri Lanka’s credit rating last month owing to fears about the country’s USD 26 billion foreign debt being defaulted on. The Census and Statistics Department (CSD) released figures revealing that the country’s GDP fell by 1.5 per cent in the third quarter of 2021.

Several geopolitical analysts have cited Sri Lanka as an example of China’s “strategic trap diplomacy” or “debt-trap diplomacy”. To understand Sri Lanka’s instability and its connection to China’s debt trap, it is essential to highlight the role of Laos in China’s debt trap. Laos has emerged as a typical illustration of China’s debt-trap diplomacy, a nation that most people in the industrialised world would fail to identify on a map.

Myanmar, Thailand, Cambodia, Vietnam, and China border Laos on the Indochina peninsula, squeezed between the Indian and Pacific Oceans. In what is known as China’s off-the-book financing practice, China has built a railway line in Laos known as the China-Laos rail network.

The rail network was initially discussed in the first decade, but the agreement was reached as part of China’s President Xi Jinping’s Belt and Road Initiative (BRI). It’s a USD 6 billion project with China owning 70 per cent of the shares.

Several Chinese government firms and a partnership of Chinese government lenders were financially involved in the project. Laos had to borrow USD 480 million from a Chinese bank to cover the remaining costs, and Laos contributed only USD 250 million on its own.

According to the agreement, Laos is accountable for the railway’s debt, of which China owns 70 per cent directly and 20 per cent indirectly. The project has cost Laos so much that its debt to China equals 45 per cent.

In September 2020, Laos, facing bankruptcy due to debt, sold a portion of its electrical system to China for USD 600 million to seek debt relief from Chinese creditors. Laos sold a key asset to China a year before the railway project could be inaugurated to cover off-the-books loans obtained from Chinese government enterprises. Laos now intends to profit from the railway network that China effectively owns while continuing to service Chinese debt. Currently, Laos is caught in China’s debt.

Sri Lanka is the most-discussed example of China’s debt-trap diplomacy, with riots over rationing, 12-hour power outages in cities, and military deployment to deal with demonstrators, although the whole national council of ministers has resigned during the financial crisis. Hundreds of thousands of refugees attempt to cross the Palk Strait into India.

During Sri Lanka’s terrible civil war, which concluded in 2009, the Chinese hand arrived on the island. China regarded the civil conflict in Sri Lanka as a chance to compete with India. During the civil war, it supplied weaponry to the government, spent money on long-term initiatives, and used its veto to protect Sri Lanka at the United Nations.

The expansion of the Hambantota port in South Sri Lanka was one of the concerns in Sri Lanka. It is the house of the Rajapaksa family’s President and Prime Minister. It was a USD 1 billion project financed by Chinese financiers. They paid for it by hiring Chinese port developers. Several Rajapaksa family members were accused of corruption in the project.

Sri Lanka’s debts grew dramatically. To settle the debt, Sri Lanka agreed to let China Merchants lease the Hambantota port for 99 years in exchange for new loans from the Chinese government. A USD 1 billion Chinese loan had this effect. China reportedly gave Sri Lanka USD 12 billion over the years.

China focuses on financing impoverished, low-income, or economically troubled nations. As of 2020, it owed roughly USD 170 billion to low- and middle-income countries. This loan is heavily tied to the BRI and Infrastructural projects, including roadways, trains, ports and airports, mining and energy. According to AidData, over 40 economically fragile nations have “hidden debt” to Chinese lenders totalling over 10 per cent of their GDP. Some countries, including Laos, Zambia, and Kyrgyzstan, owe China more than 20 per cent of their GDP. (ANI)

Topics: Sri LankaChinaChinese Debt TrapSri Lanka-China
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