China’s Belt and Road Initiative ‘debt trap’ narrative dispelled by US report, but reveals more Sri Lankan debt

[Nan Yang]

China’s Belt and Road Initiative ‘debt trap’ narrative dispelled by US report, but reveals more Sri Lankan debt​

• China held 19.6 per cent of Sri Lanka’s US$37.6 billion external debt at the end of 2021, according to the according to the U-based China Africa Research Initiative
• Citing the handover of Hambantota International Port to China, the report said the 99-year lease was a pivotal factor in creating the ‘Chinese debt trap’ narrative

Ananta Agarwal
Published: 10:00am, 2 Dec, 2022

In 2017, Sri Lanka handed over Hambantota International Port to China on a 99-year lease in return for US$1.1 billion, stating that it would be difficult to pay back the loans taken to build the key piece of infrastructure. Photo: EPA

A US report has moved to dispel the narrative of a so-called Chinese debt trap around Beijing’s signature Belt and Road Initiative despite confirming China holds more Sri Lankan debt than widely believed.

China held 19.6 per cent of Sri Lanka’s US$37.6 billion external debt at the end of 2021, higher than the often cited figure of 10-15 per cent, according to the China Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies.

Sri Lanka’s US$7.4 billion debt to China makes up 52 per cent of the island nation’s total bilateral debt, having all been reported to the World Bank, said the report, citing loan agreements and information received from the Sri Lankan government.

Including central bank currency swaps, including one from China that it can pay back in its own currency after three years, Sri Lanka’s total debt stands at US$40.6 billion, with 22 per cent owed to Chinese creditors.

“At the end of the day, China also wants to get paid,” said Umesh Moramudali, co-author of the report, which was based on archival research, information requests and informant interviews.

Sri Lanka was forced to declare a sovereign debt default in April as record low foreign exchange reserves left it struggling to pay for essential imports, including medicine, food and fuel.

The nation of 22 million is waiting on a US$2.9 billion bailout from the International Monetary Fund (IMF), although the United Nations’ finance agency is seeking assurances from creditors, including China, India and Japan, that the debts will be restructured.

Sri Lanka’s economic crisis had been years in the making, as it is highly dependent on external borrowings to finance consumption and infrastructure projects.

A series of macroeconomic blunders, including introducing large tax cuts in 2019, running down foreign reserves to maintain the value of its rupee against the US dollar and causing a reduction in agricultural output by banning fertilisers, finally led to the sovereign default.

In 2017, Sri Lanka handed over Hambantota International Port to China on a 99-year lease in return for US$1.1 billion, stating that it would be difficult to pay back the loans taken to build the key piece of infrastructure.

“The lease of the loss-making Hambantota Port to a joint-venture led by China Merchants Port, a partially state-owned enterprise, was a pivotal factor in creating the ‘Chinese debt trap’ narrative,” the report said.

“[The loan agreements] clearly indicate that there was no asset seizure or debt for equity swap,” added Moramudali.

Chinese research ship docks at Sri Lanka’s Hambantota port amid heightened regional tensions​

As Sri Lanka was dealing with balance of payments issues, leasing the port was “identified as a potential non-debt creating foreign currency inflow which would help offset rising foreign debt repayments,” said the report.

China Merchants Port has continued to invest in the port’s capacity and has attracted foreign investment, the report added, helping to offset Sri Lanka Port Authority losses and also reduce Sri Lanka’s fiscal deficit.

In August, Ministry of Foreign Affairs spokesman Wang Wenbin said that the “so-called Chinese debt trap is a lie made up by the US and some other Western countries to deflect responsibility and blame”.

Wang said that China had worked with almost 150 countries and spent US$1 trillion as part of the Belt and Road Initiative, adding that Beijing had signed “cooperation documents” with 149 countries and 32 international organisations as of July 4, while taking on 3,000 projects.

The initiative, which is now in its ninth year, offers Chinese support, often through major state-backed enterprises, for roads, airports, seaports and other infrastructure that smooths trade in goods.

IMF strategy chief Ceyla Pazarbasioglu said on Wednesday that she will be travelling to China next week to discuss faster progress on debt restructuring for countries, including Sri Lanka.

Sri Lanka’s debt negotiations with China “could define not only the future of Chinese lending to Sri Lanka, but also to other Belt and Road Initiative countries going through debt distress, including those in Africa,” the report added.

“It will be the first time a major Asian Belt and Road Initiative borrower is going through the process.

“But given the severe balance of payments and debt distress being experienced by most developing countries, this will definitely not be the last Chinese debt restructuring.”

IMF agrees to bail Sri Lanka out with US$2.9 billion conditional package​

International sovereign bonds are the largest contributor to Sri Lanka’s external debt stock, making up around 35 per cent at the end of last year.

The effective interest rate on Chinese loans averages at 3.2 per cent, higher than Japan, the World Bank and the Asian Development Bank of between 0.9 to 1.6 per cent, but lower than 6.9 per cent for Eurobonds.

The restructuring process, though, will “be a testament to how the banks work alongside each other and how Beijing coordinates the process”, the report added.

The report also said restructuring negotiations with China are likely to take time, and cited examples of Zambia and Suriname, where it is also involved in debt restructuring.

“First China and other creditors need to give official assent to Sri Lanka not paying the debt to them in the first place,” said Thilina Panduwawala, another co-author of the report.

“We don’t think the details will be finalised in December or January.”

If the creditors agree, the IMF could disburse the US$2.9 billion to Sri Lanka, added Panduwawala.

China could provide maturity extensions and an interest rate moratorium period, although a reduction to the principal loan amount is unlikely, according to Panduwawala.


Ananta Agarwal
Ananta Agarwal previoulsy joined the Post as an intern in June 2022. She is a journalism student at The University of Hong Kong. Her work has also appeared on NBC News, AFP Fact Check and FairPlanet.