Sri Lanka’s Tottering Economy Under Chinese Debt Trap

Debt-ridden Sri Lanka has reached out to China to help restructure loan repayments
to salvage its tottering economy. Sri Lankan President Gotabaya Rajapaksa asked
visiting Chinese Foreign Minister Wang Yi that “it would be a great relief to the
country if the attention could be paid on restructuring the debt repayments as a
solution to the economic crisis that has arisen in the face of the COVID-19 pandemic,”
according to President’s office statement.
Rajapaksa also requested that China provide a concessional trade-credit plan for
Chinese imports and to assist in enabling Chinese tourists to travel to Sri Lanka under
the bio-bubble concept, according to the statement.
China is deemed to be Sri Lanka’s fourth-biggest lender and Sri Lanka is reported to
have to make about $4.5 billion in debt repayments in 2022, starting with a $500
million international sovereign bond repayment on January 18.
Sri Lanka also sees the possibility of fresh lending by China to help meet its debt
servicing obligations, Central Bank Governor said, as it faces looming maturities and
a brewing balance of payments crisis. Fitch Ratings and Moody’s Investors Service
have cut Sri Lanka’s credit score amid delays in securing fresh funds, the key to
meeting loan obligations. Sri Lanka is raising the spectre of default.
China’s loans to Sri Lanka have often been a contentious issue over the past decade,
with concerns that the country could struggle to repay and be used by Beijing to
counter India and US influence in the Indo-Pacific region. Sri Lanka had about $3.5
billion in debt from China by the end-2020, excluding loans to state enterprises,
according to central bank data.
The country’s inflation rate hit a record high of 11.1 per cent in November 2021, with
its food inflation rising to 16.9, according to data released by the Central Bank of Sri
Lanka. The increase in prices was triggered by a decline in local currency, which fell
by 7.5 per cent against the US dollar in 2021.
The government subsequently declared an economic emergency under the public
security ordinance and appointed an essential services commissioner to regulate
food prices charged by merchants and retailers
Over the past decade, China has loaned Sri Lanka more than $5 billion for highways,
ports, an airport, and a coal power plant. But critics say that the funds were used for
white elephant projects with low returns, which China has denied.
Sri Lanka is also a key part of Beijing’s Belt and Road Initiative (BRI), a long-term plan
to fund and build infrastructure linking China to the rest of the world. But other
countries, including the United States, have labelled the BRI as a “debt trap” for
smaller nations. Former US Secretary of State Mike Pompeo also has warned Sri Lanka
about doing business with Beijing, calling the Chinese Communist Party a “predator”
that continues to violate sovereignty at land and sea.