Another take on Sri Lanka and China’s “debt trap diplomacy”

Another take on Sri Lanka and China’s “debt trap diplomacy”

The panicked resignation and departure of Sri Lankan president Gotabaya Rajapaksa and his brother, prime minister Mahinda Rajapaksa, amid mass protests has drawn global attention to the nation’s economic collapse.

Several compounding factors led to this collapse: tax cuts, a nationwide policy shift towards organic farming and the COVID-19 pandemic. The government has particularly blamed the pandemic, given that tourism is one of Sri Lanka’s biggest earners. But most critics have pointed the finger unerringly at one factor: economic mismanagement by President Rajapaksa.

At the end of the civil war in 2009, Sri Lanka decided to focus on providing goods to its domestic market instead of trying to bolster foreign trade. This meant that the bill for imports kept growing as its income from exports remained low. At the end of 2019, Sri Lanka possessed $7.6bn in foreign reserves; that number has dwindled to roughly $250 million. Sri Lanka now exports $2 billion more than it imports, further exhausting its foreign currency reserves. Rajapaksa’s tax cuts in 2019 lost the government an additional $1.4 billion in revenue. To make matters worse, in early 2021 when Sri Lanka’s foreign currency reserves became a serious problem, the government tried to save it by banning imports of chemical fertilizer, telling farmers to use locally sourced organic fertilizer instead. This led to widespread crop failure. The government was forced to supplement its food supply with imports, ultimately exhausting its foreign currency reserves.

Sri Lanka is bankrupt. It does not have enough foreign currency to pay for imported critical goods such as food, fuel and medicines. Inflation is up by 50% and, in May 2022, Sri Lanka defaulted on its foreign debt payment for the first time. The South Asian nation’s bank declared that it was now in a “pre-emptive default”. Defaults occur when a nation cannot make payments to some or all of its creditors. This, in turn, tarnishes the country’s image and reputation, ruining its future potential investments, currency and economy. 

China has been identified as a villain in this sad story. Between the years 2000 and 2020, China loaned about $12 billion to the Sri Lankan government, making Beijing, Sri Lanka’s sole majority creditor: 10% of Sri Lanka's debt comes from Chinese loans. The loans funded large-scale infrastructural projects including a port facility in the Rajapaksas’ hometown of Hambantota. Control of the port was remanded to China after Sri Lanka realised it could no longer make its loan payments. This forces one to pose the question, are developing nations are naively mortgaging off their resources and strategic assets to China? To many critics, it was confirmation of China’s imperial agenda and demonstrated the pitfalls of Chinese funding: that despite the absence of absolute political conditionality, there are certainly “strings attached” that may pose a threat to the sovereignty of a nation. Regardless, Sri Lanka opted for this path rather than going through the strenuous process of a debt restructuring dialogue with the IMF, and rigorous measures to appease the Paris Club.

Instead, it fell into what creditors are calling China’s “debt trap” diplomacy, a predatory system that traps and confines a country into a debt straightjacket. For years experts have been warning low to middle income economies against China’s “debt-trap diplomacy”, yet with the help of friendly heads and the lure of large scale investments, China managed to bag billions worth of dollars under its Belt and Road Initiative (BRI) from vulnerable nations. In 2020 Sri Lanka received a stream of $3 billion in easy credit from China to help pay some of its creditors. Unfortunately for Sri Lanka, in recent years, following a contraction in its economy, China has focused on mass debt collection rather than lending. Going to China instead of the IMF now appears to have been Sri Lanka’s greatest downfall. “Instead of making use of the limited reserves we had and restructuring the debt in advance, we continued to make debt payments until we ran out of all of our reserves,” Ali Sabry, Sri Lanka’s caretaker finance minister from April to May, told the Wall Street Journal. “If (we) had been realistic, we should have gone [to the IMF] at least 12 months before we did.”

China is not Sri Lanka’s only lender. India and Japan are also creditors, both accounting for a considerable amount of Sri Lanka’s debt. Both nations are now engaged in talks about further repayments and aid. However, China’s political involvement in Sri Lanka points towards something much deeper than mere debt. China actively supported the powerful Rajapaksa brothers’ political ideals and policies. The blatant mismanagement of state resources and funds that ultimately led to Sri Lanka’s bankruptcy transpired in full view of its majority creditor, China. It will be interesting to see how Beijing, holding the fate of a vulnerable nation in its hands, will proceed.

About the author

Qhawezo Ayesha Fakude is a Researcher at Africa Asia Dialogues (Afrasid).  She holds a Bachelor of Social Science from the University of Cape Town, South Africa. She majored in politics and governance, anthropology and sociology.

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