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Sri Lanka Accepts Chinese Demands to Avoid Debt Trap


Sri Lanka's Prime Minister Ranil Wickremesinghe, (l) chats with Chinese Premier Li Keqiang during a welcome ceremony outside the Great Hall of the People in Beijing, April 7, 2016.

Sri Lanka's Prime Minister Ranil Wickremesinghe, (l) chats with Chinese Premier Li Keqiang during a welcome ceremony outside the Great Hall of the People in Beijing, April 7, 2016.

Sri Lanka has agreed to resume work on a Chinese-funded $1.4 billion Colombo Port City project that had stalled a year ago.

The decision to restart work on the project was announced Thursday during Sri Lankan Prime Minister Ranil Wickremasinghe's visit to Beijing. The move opens the door for additional Chinese investments, and helps China forward its goal of getting access to the Indian Ocean.

The Sri Lankan leader signed several other deals during his trip for railway, road, port and airport projects that would be constructed by Chinese companies in his country.

FILE - A ship loaded with containers ready for departure is seen berthed at the Chinese-majority owned Colombo International Container Terminal (CICT) in Colombo on March 30, 2016.

FILE - A ship loaded with containers ready for departure is seen berthed at the Chinese-majority owned Colombo International Container Terminal (CICT) in Colombo on March 30, 2016.

The project has been the main point of contention between the two countries since March of last year, when Wickremasinghe stalled the project soon after coming to power. "We welcome the resumption of the Colombo Port City project, and stand ready to work with Sri Lanka to push forward the construction steadily,” Chinese Premier Li Keqiang said, underlined the importance of the decision.

Debt trap

Analysts said the Sri Lankan leader's decision to resume work on the project is a desperate measure to stop his country from heading towards a debt trap. Sri Lanka is finding it extremely difficult to raise fresh funds from the world market after international ratings firms Fitch and Standard & Poor’s reduced the South Asian nation's credit rating in February and March.

Sri Lanka wants China to reschedule past loans amounting to about $5 billion, and extend fresh loans. This includes Chinese finance for $1.6 billion to spend on a seaport and an airport in Hambantota, the home region of former Sri Lankan President Mahinda Rajapaksa, who was known to be close to China.

Financial problems and the need for infrastructure funding were the main reasons behind Wickremasinghe’s decision to restart the Colombo Port City project, according to Weerakoon Dushni, deputy director at the Institute of Public Policy in Colombo. “Managing loan repayments is a major problem. Nearly half of Sri Lanka’s external debt has been raised on non-concessional and commercial terms,” she said adding, “We need to engage with China both in political and economic terms.”

Sri Lankan Prime Minister Ranil Wickremesinghe (2nd L) and Chinese Premier Li Keqiang review an honor guard during a welcome ceremony outside the Great Hall of the People in Beijing on April 7, 2016.

Sri Lankan Prime Minister Ranil Wickremesinghe (2nd L) and Chinese Premier Li Keqiang review an honor guard during a welcome ceremony outside the Great Hall of the People in Beijing on April 7, 2016.

Some experts believe Sri Lanka has approached China for help because India and the United States failed to provide assistance. “The major task for Sri Lanka's current government is economic development. Yet after its attempt to reduce its reliance on Beijing, Colombo has realized that there is no alternative,” Zhao Gancheng, director of South Asia Studies at the Shanghai Institute for International Studies told the Global Times newspaper. “Over the past year, neither India nor the U.S. has provided it with attractive mega-projects that China did. It is therefore natural for Sri Lanka to turn around and embrace China again,” Zhao said.

Indian Ocean connectivity

He also said Sri Lanka is trying to use its location on the Indian Ocean to attract Chinese investments. “Apart from the already existing cooperation, including the construction of Hambantota Port, Sri Lanka is now expecting to use its own geographical position to ink more new joint programs with China,” said Zhao.

China needs Sri Lanka to get access to the Indian Ocean, which has an heavy presence of Indian and U.S. navies, for both military and commercial reasons. It is pouring $46 billion on a corridor project that would connect the Chinese border in Xinjiang to the Gwadar port on the Arabian Sea in Pakistan, 1200 kilometers away.

“Sri Lanka is in the midst of important sea routes. China is engaging with Sri Lanka partly because of strategic reasons. Besides, it is focused on the 'One Belt, One Road program,' in which Sri Lanka can have an important role,” said the Institute of Public Policy's Dushni.

Important question

An important question is whether Sri Lanka really needs the China backed projects.

works at a construction site of an apartment complex in Colombo March 8, 2016. Sri Lankan Prime Minister Ranil Wickremesinghe, saying his country must break out of a debt trap, on Tuesday announced a rise in value added tax (VAT) and said the government will impose a capital gains tax.

works at a construction site of an apartment complex in Colombo March 8, 2016. Sri Lankan Prime Minister Ranil Wickremesinghe, saying his country must break out of a debt trap, on Tuesday announced a rise in value added tax (VAT) and said the government will impose a capital gains tax.

“The Chinese funded airport in the Hambantota area has been used to store gains. The Hambantota seaport, which was also financed by China, has remained largely unused,” Smruti Pattanaik, research fellow at the Institute for Defense Studies and Analysis in New Delhi, said.

Chinese backed projects, including the airport and sea port in Hambantota and the Colombo Port City plan, have been a matter of raging political controversies in Sri Lanka in recent years. During the 2014 elections, opposition leaders accused the associates of then-president Rajapaksha of taking bribes from Chinese companies. Those critics are now in power.

"The Sri Lankan government is in a real dilemma. It is almost bankrupt and needs money to run the economy,” Chaminda Hettiarachchi, lecturer and researcher at the Colombo University, said. “Sri Lanka needs Chinese money at least in the short term. But Chinese projects are not useful to the Sri Lankan people.”

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