Sri Lanka succumbs to China's debt-trap diplomacy

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Sri Lanka succumbs to China's debt-trap diplomacy: Report
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https://www.aninews.in/news/world/asia/ ... 412150301/

Sri Lanka Total Gross External Debt
In Sri Lanka, external debt is a part of the total debt that is owed to creditors outside the country.
Actual Previous Highest Lowest Dates Unit Frequency
50724.21 51117.43 55915.96 37098.10 2012 - 2021 USD Million Quarterly Current Prices, NSA

Over the last decade, Sri Lanka amassed a debt of $5 billion to China alone

A history of debt
The Asian Development Bank in 2019 described Sri Lanka’s economy as “a tale of two deficits.”

The island nation consistently imports more than it exports, creating a trade deficit, while government spending habitually exceeds government revenue, creating a budget deficit. The dual debts are a recipe for economic crisis, which Sri Lanka is stomaching now.

To sustain its overdrawn government budget, Sri Lanka has historically loaded up on debt and borrowed huge sums to invest in massive infrastructure projects—such as the Chinese-funded Hambantota International Port—with hopes that the end result would drive economic growth. Sri Lanka’s current debt-to-GDP ratio has skyrocketed in recent years, increasing from 42% in 2019 to 104% in 2021.

But many of its costly infrastructure projects have been economic duds, and without any genuine source of revenue, the Sri Lankan government is left unable to repay the interest on its loans.

According to Bloomberg, Sri Lanka has about $8.6 billion in debt payments due this year, yet, as of March, the country has only $1.94 billion in its reserves. Sri Lanka must pay $78.2 million in interest payments on April 18, followed by a $1 billion payment on a bond maturing on July 25. Investors doubt Sri Lanka will be able to make the July payment, with the bond trading well below face value at $0.54 to the dollar on Thursday.

The Sri Lankan government has tried to find ways to bolster its foreign reserve holdings so that it has enough money to settle its debt payments. On March 12, the central bank ordered Sri Lankan exporters to convert their foreign currency into rupees within 180 days to help replenish the bank’s foreign reserves. But with debt levels almost four times the country’s reserves, a payments crisis is brewing.

Enter COVID
Sri Lanka’s ability to service its debt was always shaky, but government policy and the COVID pandemic made the task almost impossible.

In 2019, then–finance minister Basil Rajapaksa—younger brother to both the president and prime minister—passed a series of drastic tax cuts ahead of parliamentary elections, in a bid to ease the strain placed on Sri Lanka’s economy by the deadly Easter bombings of April 2019. The multiple bombings, which killed over 260 people, devastated Sri Lanka’s tourism industry, which contributed almost 13% of the country’s GDP before the pandemic and is an important source of foreign currency.

But in 2020 the COVID pandemic brought tourism levels to a low point: By 2021, Sri Lanka had welcomed just 173,000 travelers for the year, down from 2.3 million in 2018.

Arguments
The Chinese government's overseas-development policy has been called debt-trap diplomacy because if an indebted country fails to service its loans, it becomes vulnerable to pressure from China to support its geostrategic interests.[14] According to Brahma Chellaney, "It's clearly part of China's geostrategic vision".[15] The Chinese government has been accused of requiring secret negotiations and non-competitive pricing on projects in which bidding is closed and contracts must go to Chinese state-owned or state-linked companies which charge significantly above-market prices.[16]

Western,[17][18] Indian,[citation needed] and African[19][20] media outlets have criticized the terms of Chinese state loans and their high interest rates. One example was a 2006 loan to Tonga to rebuild infrastructure.[21] In 2013 and 2014, Tonga experienced a debt crisis when the Exim Bank of China (its creditor) did not write them off;[22] the loans cost 44 percent of Tonga's gross domestic product (GDP).[22] According to some analysts, such practices highlight China's hegemonic intentions and its challenges to state sovereignty.[23][24]

In August 2018, a bipartisan group of 16 U.S. senators cited "the dangers of China’s debt-trap diplomacy": "It is imperative that the United States counters China’s attempts to hold other countries financially hostage and force ransoms that further its geostrategic goals".[25] In an October 2018 speech, U.S. Secretary of State Mike Pompeo said that China's loans are facilitated with bribes: "China shows up with bribes to senior leaders in countries, in exchange for infrastructure projects".[26][27] S. K. Chatterji at Asia Times commented that China's BRI-led debt-trap diplomacy is the economic aspect of China's salami slicing strategy.[28] A 2018 paper published by the Belfer Center for Science and International Affairs posited three strategic goals behind China's lending: "filling out a 'String of Pearls' to solve its 'Malacca Dilemma' and project power across vital South Asian trading routes; undermining and fracturing the US-led regional coalition contesting Beijing's South China Sea claims; and enabling the People's Liberation Army Navy to push through the 'Second Island Chain' into the blue-water Pacific".[9]

Counter-arguments
Deborah Bräutigam, a professor at Johns Hopkins University's School of Advanced International Studies (SAIS), described debt-trap diplomacy as a "meme" which became popular due to "human negativity bias" based on anxiety about the rise of China.[5] According to a 2019 research paper by Bräutigam, most of the debtor countries voluntarily agreed to the loans and had positive experiences working with China and "the evidence so far, including the Sri Lankan case, shows that the drumbeat of alarm about Chinese banks' funding of infrastructure across the BRI and beyond is overblown ... a large number of people have favorable opinions of China as an economic model and consider China an attractive partner for their development."[5] Bräutigam said that the theory lacked evidence, and criticized the media for promoting a narrative that "wrongfully misrepresents the relationship between China and the developing countries that it deals with."[29] An August 2018 China Africa Research Initiative report co-authored by Bräutigam said, "Chinese loans are not currently a major contributor to debt distress in Africa."[30] A BBC broadcast recording used clips of a brief interview with Bräutigam and misrepresented her position on the debt-trap issue, discarding all the evidence she brought forth that the "conventional wisdom was not correct." In December 2021, the BBC reporter that had reached out to Bräutigam said that it was an editing decision by an inexperienced producer.[31][32][33]

A March 2018 report released by the Center for Global Development said that between 2001 and 2017, China restructured or waived loan payments for 51 debtor nations (most of the BRI's participants) without seizing state assets.[34] W. Gyude Moore, a former Liberian public works minister and senior policy fellow at the Center for Global Development, said that year: "The language of 'debt-trap diplomacy' resonates more in Western countries, especially the United States, and is rooted in anxiety about China's rise as a global power rather than in the reality of Africa."[35] Moore added, "China has been a net positive partner with most African countries."[36]

A 2019 report by the Lowy Institute said that China had not engaged in deliberate actions in the Pacific which justified accusations of debt-trap diplomacy (based on contemporaneous evidence), and China had not been the primary driver behind rising debt risks in the Pacific; the report expressed concern about the scale of the country's lending, however, and the institutional weakness of Pacific states which posed the risk of small states being overwhelmed by debt.[37][38] A 2020 Lowy Institute article called Sri Lanka's Hambantota International Port the "case par excellence" for China's debt-trap diplomacy, but called the narrative a "myth" because the project was proposed by former Sri Lankan president Mahinda Rajapaksa, not Beijing.[39] The article added that Sri Lanka's debt distress was not caused by Chinese lending, but by "excessive borrowing on Western-dominated capital markets."[39]

The Rhodium Group has said that China's leverage in debt renegotiation is often exaggerated, and was realistically limited in power; its study frequently showed an outcome favoring the borrower, rather than the supposedly-predatory Chinese lender.[40] According to a May 2019 Sydney Morning Herald article, the term was being questioned by new research; an analysis of 40 Chinese debt re-negotiations by the Rhodium Group found "asset seizures are a very rare occurrence", and debt write-off is the most common outcome.[41] The article also reported the views of Australian National University senior lecturer Darren Lim, who (referring to the Rhodium Group study) said that much of the leverage shifts to the borrower rather than the lender after the loan has been made. Lim also said that although the debt-trap diplomacy theory was never credible, the Trump administration embraced it.[41] La Trobe University head of humanities and social sciences Nick Bisley said that China aimed to build political capital through the BRI, but asset seizures would not achieve that end.[41]