It is also obvious that the way China handles Sri Lanka’s issue will have a significant impact on the future of China’s debt strategy in other developing nations across the world
Sri Lanka and China share an ‘all-weather friends’ relationship. Long-standing diplomatic ties between Sri Lanka and China have developed into an infrastructure-focused economic partnership. Beginning in the early 1970s, China began to offer support for the economic development of some landmark projects in the country. The financial assistance offered by China has increased significantly since 2005. Soon their relationship transformed into a model that made use of interest-bearing loans and foreign direct investments. With Chinese assistance, the Mahinda Rajapaksa administration launched significant transportation, energy, and telecommunications projects. Some of these were the coal-fired Norocholai power station in 2006, the Hambantota port in 2007, the Mattala International Airport in 2010, the Colombo International Container Terminal at the Colombo port in 2011, and the Lotus Tower in 2012. With the launch of China’s BRI (Belt and Road Initiative) strategy in 2013, projects like Colombo Port City were taken up and further investment was made in earlier projects like the Hambantota port deal (Wignaraja et al. 2020).
During the period between 2006 and 2019, the total value of Chinese investment in Sri Lanka was around $12.1 Billion (Wignaraja et al. 2020). According to a data analysis, China’s bilateral assistance and export credit loans have tripled from US $386.1 million in 2007 to US$1.2 billion in 2009 (Nilanthi Samaranayake 2011). The major sector of Chinese investment is the road and expressway, which accounts for over 68% of the country’s total expressway length. The other significant sector which has received Chinese investment and loans is the port projects.
Port City – Colombo
The Port City of Colombo (PCC) is the dream project of Sri Lanka that was unveiled during Chinese President Xi Jinping’s visit in 2014. Since Colombo is one of the top 25 busiest ports in the world, the proposed project promoted Colombo as a “world-class city” not only for Sri Lanka but also for South Asia as a whole (Revi 2021), with the government expecting to turn it into a financial centre like Singapore and Dubai. The initiative is supposed to improve Sri Lanka’s economy, which is primarily dependent on the export of tea and tourism, to more prosperity through a wide range of service sectors. It is projected to cost $14 billion, with China investing $1.4 billion to assist PCC in reclaiming 269 hectares of land in the Indian Ocean. In return, China received a 99-year lease over 116 hectares of the surrounding area. The initiative is a private-public partnership project between the Sri Lankan government and CHEC Port City Colombo Pvt. Ltd. It is also the first Special Economic Zone of Sri Lanka. CHEC Port City Colombo Pvt. Ltd is a part of China Communication Construction Enterprise, which is the state-run infrastructure company that oversees the Belt and Road Initiative (Basu 2022). However, even if Port City manages to produce a sixth of Sri Lanka’s present economic production by 2041, as suggested by an independent study, it will still be a costly venture. Even though China is funding its construction, these commercial activities will provide little income for the debt-ridden country (Mukherjee 2022).
The Hambantota Port
The Hambantota port is in southern Sri Lanka. Its construction began in 2008. The port was built under the state-owned enterprises – China Harbour Engineering and Sinohydro Corporation. Around $1.4 billion was financed by EXIM Bank China in the form of three fixed interest rate loans (Wignaraja et al. 2020, 9). The project’s first phase was finished in 2010 at a cost of US $361 million (Samaranayake 2011), and the port started operations in November 2011. The second phase started in 2012 and ended in 2015. The project took more time than was expected to complete, and was not very successful, leading to a substantial capital loss. By 2016, the Sri Lanka Ports Authority, which owned the Hambantota Port, had suffered losses roughly amounting to SLR 46.7 billion. By this time, it was also evident that this extravagant project was not commercially viable, as had been demonstrated in preliminary feasibility studies (Gupta 2022). To counter this financial loss, the government, in 2017, decided to grant the port to the Chinese state-owned enterprise – China Merchant Port Holdings Company Limited – for a 99-year lease. The revenue from the contract was primarily utilised to address the balance of payment problems brought on by the rising cost of debt payments in the country.
The leasing of the port also represents Sri Lanka’s current external sector crisis (Moramudali 2020). Despite restructuring and turning it over to a Chinese entity for 99 years, Sri Lanka is still responsible for paying the debt associated with the failed port. The presence of the established trans-shipment hub, Colombo Port, which is 200 kilometres from Hambantota also makes the port commercially unviable. Because of this proximity issue, even though the port possesses several berths for diverse purposes, just about 400 vessels visit it each year as compared to 4,000 vessels in Colombo Port (Gupta 2022). Moreover, the Mattala Rajapaksa International Airport (MRIA) constructed in the southern Hambantota district with a $200 million loan from China, is referred to as the “emptiest airport in the world” (Shepard 2016).
Investments in the Energy sector
Another key sector that has received Chinese investment is the energy sector. The Norocholai power station was built by the China Machinery Engineering Corporation over a seven-year period in three phases. Three loans from the EXIM Bank of China totalling $1.4 billion and extra funding from the Sri Lankan government contributed to its co-financing. The power plant is now the largest and a vital contributor to the nation’s electricity supply (Wignaraja et al. 2020).
Projects’ Viability and Performance
In the Global Competitiveness Report 2019, released by the World Economic Forum, Sri Lanka ranked 84 out of 141 countries, which shows that the country’s infrastructure performance is far worse than that of other middle-income economies like Malaysia (Wignaraja et al. 2020). According to the publicly available figures, the Chinese debt is around 10% of Sri Lanka’s total foreign debt of $55 Billion and the actual figures are much higher than that. Chinese loans to Sri Lankan state-owned firms and other sorts of loans are not included in the current official estimates. According to some experts, this might amount to more than the US $6 billion, or about 20% of Sri Lanka’s external debt with higher interest rates (Gupta 2022).
The protracted effects of Chinese investments must be carefully re-examined by the Sri Lankan government so as to prevent an increase in China’s coercive influence
Hambantota Port which was built in the home district of the Rajapaksa family clearly portrays the family’s interest in their hometown. The 99-year lease of the port reflects the ever-increasing hold of China on the trade in the strategic Indian Ocean region and there are also prevailing accusations that China is likely to use the port for military purposes in future. In the case of Port City Colombo, scholars worry that it might develop into another Hambantota. Given the present situation, where Sri Lanka is unable to pay its obligations, Colombo Port City may also fall into Chinese control. Due to the political upheaval and financial issues the project construction has been interrupted multiple times.
The main causes behind the failures of these projects are that many of these were undertaken for political expediency and electoral considerations rather than for sound economic analysis and commercial viability. The government did not conduct proper feasibility studies to establish the commercial viability of these projects. Unbridled corruption made it worse. For the Hambantota port, more connectivity projects would provide more market and for the Port City Colombo, proper management plans should be given during its ongoing construction period.
The protracted effects of such Chinese investments must be carefully re-examined by the Sri Lankan government so as to prevent an increase in China’s coercive influence. In light of the current economic crisis in Sri Lanka, China as the largest creditor in the country should offer reasonable restructuring on its loans. China’s response to the current crisis, particularly in the aftermath of the large-scale protests and a new government, will impact the relations between the two countries. It is also obvious that the way China handles Sri Lanka’s issue will have a significant impact on the future of China’s debt strategy in other developing nations across the world (Latiff and Wijesinha 2022).
References
Basu, Nayanima. 2022. “Crisis-Hit Sri Lanka Bets Big on $14 Bn China-Backed Port City, Wants Reluctant India to Invest.” ThePrint. March 24, 2022. https://theprint.in/diplomacy/crisis-hit-sri-lanka-bets-big-on-14-bn-china-backed-port-city-wants-reluctant-india-to-invest/883643/.
Gupta, Shishir. 2022. “Was Cash Strapped Sri Lanka Duped by China in Hambantota Port?” Hindustan Times. June 26, 2022. https://www.hindustantimes.com/world-news/was-cash-strapped-sri-lanka-duped-by-china-in-hambantota-port-101656205405799.html.
Latiff, Aquilah, and Anushka Wijesinha. 2022. “Understanding China’s Role in Sri Lanka’s Debt Restructuring Efforts.” Thediplomat.com. August 2, 2022.
Moramudali, Umesh. 2020. “The Hambantota Port Deal: Myths and Realities.” Thediplomat.com. January 1, 2020. https://thediplomat.com/2020/01/the-hambantota-port-deal-myths-and-realities/.
Mukherjee, Andy. 2022. “Port City Colombo: The Great Chinese White Elephant of Sri Lanka.” Business Standard India, April 14, 2022. https://www.business-standard.com/article/international/port-city-colombo-the-great-chinese-white-elephant-of-sri-lanka-122041400365_1.html.
Revi, Vinitha. 2021. “Colombo Port City Project: Controversial since Its Inception.” ORF. December 28, 2021. https://www.orfonline.org/expert-speak/colombo-port-city-project/.
Samaranayake, Nilanthi. 2011. “Are Sri Lanka’s Relations with China Deepening? An Analysis of Economic, Military, and Diplomatic Data.” Asian Security 7 (2): 119–46. https://doi.org/10.1080/14799855.2011.581603.
Shepard, Wade. 2016. “For Sale: The World’s Emptiest International Airport.” Forbes. July 18, 2016. https://www.forbes.com/sites/wadeshepard/2016/07/18/for-sale-the-worlds-emptiest-international-airport-mattala-international-hambantota-sri-lanka/?sh=74595f4c1e3b.
Wignaraja, Ganeshan, Dinusha Panditaratne, Pabasara Kannangara, and Divya Hundlani. 2020. “Chinese Investment and the BRI in Sri Lanka.” Chatham House – International Affairs Think Tank. March 24, 2020. https://www.chathamhouse.org/2020/03/chinese-investment-and-bri-sri-lanka-0/2-economy.
Feature Image Credits: South China Morning Post
1 comment
That’s a great piece of article from a budding scholar. Well articulated.