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Pandemic, Chinese loans put Sri Lanka in dark straits


Sri Lankans are enduring rolling power cuts and long lines to buy necessities such as milk powder and cooking gas due in part by unpaid Chinese loans and a sluggish tourism industry.

Sri Lanka’s tourism-dependent economy struggled over the past two years as the COVID-19 pandemic triggered worldwide travel restrictions. The economy contracted by 1.5% from July to September 2021, and inflation surged to 12.1% in December 2021, reported the online magazine The Diplomat.

Sri Lanka has foreign debt obligations of U.S. $7 billion in 2022 alone, the magazine reported, with a U.S. $1 billion bond payment due in July. Fuel imports were slowed by Sri Lanka’s cash shortage, and the power shortage was exacerbated by plunging water levels at hydroelectric dams that reduced power production. The government began switching off power on a rotating basis among regions in late February 2022 to deal with the emergency, The Diplomat reported.

At the center of the crisis is unpaid foreign debt. As the country risked going into default, its leaders in January 2022 sought relief from the People’s Republic of China (PRC), reported WION, a global news network based in India. “It would be great relief to the country if attention could be paid to restructuring the debt repayments as a solution to the economic crisis that has arisen in the face of the COVID-19 pandemic,” Sri Lankan President Gotabaya Rajapaksa told visiting Chinese Foreign Minister Wang Yi in January, WION reported. Yet, the PRC offered no relief. “Sri Lanka will surely overcome the temporary difficulties as soon as possible,” a Chinese Foreign Ministry spokesperson said.

Since 2007, Sri Lanka has piled up U.S. $11.8 billion worth of debt through sovereign bonds, which makes up 36.4% of its external debt. Its second largest creditor is the Asian Development Bank, which loaned Sri Lanka U.S. $4.6 billion, Reuters reported. Its next largest creditors are Japan and the PRC, which both are owed about U.S. $3.5 billion.

Ratings agencies downgraded Sri Lanka’s borrowing power, and Fitch Ratings Inc. in December 2021 signaled that Sri Lanka had an increased probability of credit default, The Associated Press reported. (Pictured: Pedestrians wait to cross a road during a power outage in Colombo, Sri Lanka, on March 2, 2022.)

Although the PRC is not Sri Lanka’s largest creditor, its projects have been the most controversial because critics say they afforded the PRC strategic advantages while not being financially viable. One of the most high-profile examples is the Hambantota Port, which opened in November 2010 with Chinese funding and eventually was turned over to Chinese control. In 2017, China Merchants Port Holdings Co. Ltd. acquired a 70% stake in the project in a joint venture with the state-run Sri Lanka Ports Authority, the Financial Times newspaper reported.

Negotiations around the port “sparked local protests and accusations that Sri Lanka was selling its sovereignty,” stated a report from the Center for Strategic and International Studies (CSIS). “Some observers worry that China’s infrastructure investments are creating economic dependencies, which are then exploited for strategic purposes.”
As the port struggled financially with paltry shipping traffic, those fears were heightened in 2014 when a Chinese submarine docked at Colombo, Sri Lanka’s capital, “setting off alarms about China’s expanding military footprint.”
Unlike Colombo, where the Sri Lanka Navy is headquartered, Hambantota is more isolated and could offer Chinese vessels greater independence, the CSIS report said.


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