Chinese Debt Trap

Chinese Debt Trap

Chinese Debt Trap over Sri Lankan economy is growing with Chinese stranglehold over Sri Lankan strategic assets.

Chinese Debt Trap | How serious is the issue?

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  • The total debt of Sri Lanka is about $70 billion and over $8 billion is owned by China,
  • Sri Lanka’s debt to GDP ratio stands currently at around 75%.
  • Over 95% of all government revenue is going for debt repayment and more than 1/3rd of it is used to serve Chinese debts.
  • Much of the debt came up during last President of Sri Lanka Mahinda Rajapaksa’s tenure during which he initiated several large scale and extremely expensive infrastructure projects with Chinese loans. This has led Sri Lanka being pushed to the brink of bankruptcy, prompting an IMF bailout.
  • Current Government under President Sirisena has made a U-turn by swapping the debt of China with equity, lending a permanence to Chinese presence in Sri Lanka.
  • Sri Lanka has reversed the suspension of Chinese controlled ‘Colombo Port City’ project. The area given to China on a 99-year lease has also been increased and the Chinese companies involved have been offered lucrative tax breaks.
  • China has also been given 80% ownership of the Hambantota port in the south. The ‘Mattala Airport’ ($300-400 million Chinese loan and $100-120 million operational charges per annum being spent by Sri Lanka itself) at the Hambantota has also been given to a Chinese firm to manage and operate. A 15,000 acre Chinese led industrial zone nearby has been revived.
  • Economists say that if the Government debt is around 100% of GDP, then an economy is in trouble. Sri Lankan debt is close to 89% of GDP. Moreover, it cannot print its own currency too for clearing the debt.
  • Around $35 billion of the debt is serviceable because it carries low interest rates, most probably being forwarded by multilateral institutions like the World Bank.
  • The $8 billion Chinese debt is a high cost debt. It carries an interest rate of about 8-9%. Therefore, China is arm twisting Sri Lanka to either clear the debt or ‘defer’ (not cancel) the debt through strategic favours.
  • It might be unsustainable for Sri Lanka because the contracts signed with China are heavily one-sided in favour of China, so Sri Lanka should push for renegotiation of the contracts.
  • Under the new Government, despite having no big projects initiated, the domestic debt grew by 12% and foreign debt grew by 25%.
  • The only Chinese project which is doing well in Sri Lanka is the ‘Colombo Container Terminal’

Chinese Debt Trap | Relationship between the two countries

Immediately after the BIMSTEC meeting in India, Sri Lanka handed over the equity control of the Hambantota Port to China whereby the Sri Lankan Port Authority would develop the port with Chinese credit. The relationship between Sri Lanka and China has been upgraded to what is being called “all weather partnership”. More than a relationship of trust, it is seen as a relationship out of compulsion.

Chinese Debt Trap | Hambantota Project

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  • It is worrisome for India if Sri Lanka fails to service its debt on Hambantota, considering its strategic location and a supporting air field, which is being handed over to China. China is ready to take 80% of its equity.
  • It is located within 1300 kilometres from India’s two strategic naval bases (Vishakhapatnam and Andaman and Nicobar) in the Bay of Bengal.
  • Sukhoi base in Thanjavur is also located nearby from the Hambantota project.
  • Sri Harikota is also located in the region which is our military and space vehicles launching port.
  • Therefore, India should draw a red-line for China in case it starts using the same as a dockyard for submarines or other military assets.

Chinese Debt Trap | Why China is investing so heavily in Sri Lanka?

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  • China is deliberately parking its investment abroad to avoid service costs and no-interest regimes of the developed world (western world). It cannot park the funds in China because it may lead to hyperinflation.
  • In Hambantota project, China extracted 90% of its returns from Sri Lanka in the form of raw materials.
  • This parking of funds earns Sri Lanka strategic leverage, higher return on investment and reciprocity and permanence in foreign policy objectives from the targeted countries.
  • Chinese labour, Chinese machinery and thereby Chinese manufacturing sector gets a boost from such investments.
  • Most importantly, China has global ambitions in the form of controlling the communication routes to Eurasia.
  • And of course, the strategic aim to contain India has always been there.

Chinese Debt Trap | Indian Approach

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  • We don’t have resources to match with China. Hence, we shall join hands with our friendly countries such as Japan and OECD to work in tandem with them to ensure that none of our neighbouring countries become exclusively or overly dependent on China.
  • We shall engage the donor and the recipient bilaterally to work out a viable alternate combination and help the recipient secure a soft way out of this debt trap.
  • India should not be alarmed by such situations because anyhow the projects China has managed to secure in Sri Lanka are unviable in both economic and up to some extent in strategic terms too.
  • Chinese policy is clear – overall dominance of Asia, and both India and Japan share this view. India should deal this with the least confrontational but the most effective manner.
  • India should also improve its track record in project implementation in case of ‘some’ projects such as Kaladan Multimodal Project, Chabahar Project etc. to earn a respectable share of strategic assets in our regions of interest.
  • India is having a very high level of economic and diplomatic expertise by which it has managed to avoid non-viable projects since independence. It should also communicate its neighbours regarding the ways to secure a viable deal with China and other powers which milk them in the long run but look lucrative in the short run.
By | 2016-12-05T08:45:50+00:00 December 5th, 2016|Categories: Economy, GS Paper 2, GS Paper 3, World Affairs|Tags: , , |0 Comments

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