[Politics]Why Sri Lanka’s Default was not Caused by China

[Dr@g0n]

Sri Lanka is facing its first debt default since its independence. On 12 April 2022, the Sri Lankan government announced that it will suspend all foreign debt repayments, except to multilateral development banks. It is now seeking a bail-out from the International Monetary Fund (IMF) and needs to restructure nearly USD $30 billion of debt. To many, the default is the consequence of China’s ‘debt-trap diplomacy’. Sri Lanka, as the common wisdom goes, has already had to cede the port of Hambantota to China because it could not pay its debt. The Hambantota debt-trap “meme”, as Deborah Brautigam has called it, continues to circulate even among China experts, but it has long been debunked by Sri Lankan economists. The real picture of Sri Lanka’s debt distress is much more complicated. Hambantota: China’s ‘debt-trap diplomacy’? The term ‘debt-trap diplomacy’ was po[CENSORED]rized by the Indian geostrategist Brahma Chellaney. In a widely cited opinion piece, Chellaney argued that entrapping countries through oversized loans was “clearly part of China’s geostrategic vision”, and he accused China of designing projects in a way that makes it difficult for countries to repay their debt, forcing them to hand over strategic assets to China. The background to Chellenay’s allegation was that, in October 2016, Sri Lanka announced that it would hand over 80 per cent of the Hambantota Port to China Merchants Holding. Reuters reported that Sri Lanka would sell the stake “to cut the country’s debt burden”. According to Sri Lanka’s Finance Minister Ravi Karunanayake, the money from the deal was to be used “to repay expensive foreign loans”. The port, however, was not ‘sold’ to China; as Sri Lankan newspapers reported, it was a lease for 99 years. Karunanayake’s statement, nonetheless, was (mis)interpreted as to mean that Sri Lanka had to cede the port because it could no longer pay its debt to China. The Hambantota debt-trap “meme”…continues to circulate even among China experts, but it has long been debunked by Sri Lankan economists. The debt-trap diplomacy narrative went viral. In May 2018, a Harvard graduate students’ policy analysis exercise paper for the US State Department named Hambantota a case of China’s “Debtbook Diplomacy”. The authors described it as an example of what the 2018 US National Defense Strategy had defined as “predatory economics”: China pursued a “coercive leveraging of debt to acquire strategic assets”. Several newspapers cited this as academic proof of China’s predatory lending. Paying the West However, as Sri Lankan economists subsequently pointed out, Sri Lanka’s repayment crisis had little to do with China. Certainly, the Hambatonta Port’s construction was economically a questionable undertaking, but the loans for its construction, obtained from China Eximbank in several instalments, were mostly on concessional terms, typically at fixed rates of 2 per cent, with other fees of 0.5 per cent and average maturity of 15-20 years. At the time of the lease, debt repayments for Hambantota amounted to only about 5 per cent of Sri Lanka’s total annual external debt, as repayment of some loans had not even begun. The largest portion of Sri Lanka’s foreign debt was international sovereign bonds (ISBs), commercial borrowings obtained from international capital markets since 2007.
link:https://southasianvoices.org/why-sri-lankas-default-was-not-caused-by-china/