February 20, 2024

Sri Lankan Crisis between Debt-trap and Strategic-trap: The Chinese Stake

7 min read

by Asanga Abeyagoonasekera

There have been multiple debt trap myth-busting articles; the Chinese embassy in Sri Lanka endorsed some. The article by Deborah Brautigam, clarifying there is no debt trap in the island nation, was one of them. Brautigam says, “Critics invariably point to a single case—the Chinese takeover of Sri Lanka’s Hambantota Port—as proof of this strategy. Yet the evidence for this project being part of a Chinese master plan is thin.” Today, the Sri Lankan political economy is in a crisis, and China is considerably responsible for the crisis. I have predicted the coming dysfunctionality of the political economy and the danger inherent in Colombo’s China tilt in my previous writings.

People are out in the streets today with slogans seeking dismissal of the Rajapaksa regime. One of Asia’s oldest democracies is now struggling to survive another day. The protest at the President’s house had a ripple effect and extended to the entire nation. The entire cabinet crippled the Executive by submitted resignation letters. The President immediately appointed a four-member cabinet whereupon the finance minister resigned the next day. Few weeks after another seventeen cabinet ministers were appointed. Political dysfunctionality, and the economic crisis with long power cuts and the unavailability of essential goods further aggravated the anger of the protesters.

Behind the Crisis…

Behind the crisis was an external power intervening in the Sri Lankan economy and political space. Looking at the dynamics, I can clearly say that the Chinese have carried out ‘strategic-trap diplomacy’ in Sri Lanka, a more dangerous form than ‘debt trap diplomacy.

Sri Lanka has a severe liquidity crisis with foreign reserves down to a minimum USD 500 million. It is also facing an insolvency crisis while unable to pay for its large borrowings. As much as 70 percent of the island’s infrastructure projects are constructed by China from its commercial borrowings at a higher percentage with opaqueness. China accounts for around 10 percent of Sri Lanka’s staggering foreign debt, around $3.38 billion. Sri Lanka needs to make nearly $7 billion in payments on foreign loans this year itself. China has said it will provide a US$1 billion loan to Sri Lanka, rejecting its restructuring request, where the funds will be utilized to settle previous loans from Chinese banks. The interest rate of these loans is long debated and unclear to the public, usually around 3.76 percent compared to OECD’s 1.1 percent. Another US$1.5 billion buyer’s credit from China to import materials from China was also provided.

There are large Chinese borrowings on financially unprofitable projects in Sri Lanka and many other countries. The Mattala Airport, built near a wildlife sanctuary and not operating for many years, is just one  example. Further, China has built this ancillary infrastructure for long term civil-military use to support their 99-year leased Hambanthota port. All these projects are under the Belt and Road Initiative (BRI), seen as an ambitious foreign policy strategy to bring the developing world under the Chinese orbit.

Between debt-trap and strategic trap

The phrase ‘debt-trap diplomacy’ has been quite aptly discussed by the Indian academic Brahma Chellaney since 2017, describing how the Chinese government leverages the debt burden of smaller countries for geopolitical ends. A debt-trap situation is one where “the creditor country is said to extend excessive credit to a debtor country with the intention of extracting economic or political concessions when the debtor country becomes unable to meet its repayment obligations”. Sri Lanka’s Hambanthota Port was a case that highlighted debt-trap diplomacy where a large volume of loans was given by China, and when the Sri Lankan government was unable to repay the borrowings, China took over the port on a 99-year lease in 2017. In 2018 at Hudson Institute, US Vice President Mike Pence warned of the ongoing debt-trap diplomacy in Sri Lanka and said it “may soon become a forward military base for China’s growing blue-water navy”. The Biden administration also views “China of using loans to entice borrowing countries into a ‘debt trap’ that gives Beijing sway over strategic assets and natural resources when governments can’t repay”. However, several academics debunked this assessment of debt-trap diplomacy, especially in the Sri Lankan case, as being inadequate.

Lee Jones and Shahar Hameiri authored the Chatham House paper Debunking the Myth of ‘Debt-trap Diplomacy’, pointing to five misconceptions. First, the Hambanthota Port project was not proposed by China but by the government of Sri Lanka. Although it is viewed as a request by the Sri Lankan government to develop Hambanthota, it was more of a personal request of Mahinda Rajapaksa due to the port location situated in his political constituency. Second, it was a commercial, not a geostrategic, venture; it was one of several ‘white elephant’ projects and unsustainable developmental programs. One cannot dismiss it as only a commercial venture and not geostrategic due to it being an unprofitable or unsustainable development. That the port could not generate the targeted revenue up to now is reason enough to label it geostrategic and a long-term venture. China also managed to secure the 99-year lease because Colombo could not repay the large borrowings.

Third, Sri Lanka’s debt distress was unconnected to Chinese lending, resulting from excessive borrowing on Western capital markets. In another Chatham House paper, Ganeshan Wignaraja et al., argue that there is no debt-trap diplomacy: “Sri Lanka is not in a Chinese debt trap. Its debt to China amounts to about 6 percent of its GDP”. This probably is the most widely used assessment, that Sri Lanka’s debt distress is unconnected to Chinese lending, as all other commercial borrowings are much higher than the Chinese borrowing, which is less than 10 percent. This view dismisses China’s strategic hold, limiting the argument for quantitative figures dismissing the ‘strategic trap diplomacy’.

Fourth, there was no debt-for-asset swap. Instead, after bargaining hard for commercial reasons, a Chinese SOE leased the port in exchange for $1.1 billion, which Sri Lanka used to pay down other debts and boost foreign reserves. But clearly there was a debt-for-an asset swap, and there was no hard bargaining. China did not restructure the debt nor assisted in this regard. Sri Lanka’s inability to pay the Chinese debt allowed the Chinese to lease the port. The 99-year lease agreement was in actuality an acquisition of the port and its surrounding facilities, rushed and signed on the weekend behind closed doors. The agreement is still not disclosed to the public, and China’s opaqueness have always been the case in Sri Lanka. Further, the lack of transparency was proven when the Sri Lankan foreign minister revealed, “There is a provision for a further 99-year extension of the lease”.  Fifth, Chinese navy vessels cannot use the port, which will instead become the new base of Sri Lanka’s own southern naval command. All these problems arose not from a carefully crafted top-down strategy. The argument that Chinese navy vessels cannot enter the port is incorrect, as the former director-general of the national security think tank and I have discussed this topic multiple times and concluded that the Chinese navy could enter the port as well as provide logistics facilities to the People’s Liberation Army (PLA) Navy, clearly highlighted by the 2021 Pentagon Report.

Hambanthota Port was initially handed over for construction in 2008. China’s large scale military assistance during the last phase of the civil war surpassed other nations, which contributed to ending the three-decade war. This was the primary factor that gave China the open window to win Mahinda Rajapaksa’s confidence. Hambanthota Port was awarded to China, and a few years later, Colombo International Container Terminals (CICT) terminal operations were also awarded to China.

Strategic-trap diplomacy describes a scenario beyond debt-trap diplomacy where a human rights, political and security perspective is added. In the case of a strategic-trap, the creditor country not only focuses its assistance on credit and excessive loans but simultaneously intervenes in the nation’s human rights, political and security sphere. China offers financial loans to trap nations like Sri Lanka and offers human rights protection, support to alter the existing democratic political model towards an autocratic model and military assistance.

In Sri Lanka, strategic-trap diplomacy was carried out as an extension to debt-trap diplomacy, where three characteristics are identified apart from the financing model. First, in the political dimension, China’s involvement in installing an alternative model away from the democratic model, an authoritarian model, China’s assistance to the Rajapaksa political party and support funding. Second, in the human rights dimension, where China has supported the Sri Lankan regime on human rights concerns, the Sri Lankan government had no other option but to reciprocally support China’s human rights concerns in Xinjiang. Third, a military dimension is added to the strategic-trap where China favors a heavily militarized model.

The quantitative economic projection falls short in capturing the strategic depth of these projects. All the Chinese projects have a long-term strategic design that could comfortably bring a ‘hybrid model’ of civil-military activity to the country concerned, a security concern for Sri Lanka and the region. Calculating the volume of loans provided by other foreign nations and sovereign bonds/private commercial loans vis-a-vis that from China is an oft-quoted argument to dismiss the theory of debt-trap diplomacy; however, it does not dismiss China’s strategic-trap diplomacy.

Debt-trap diplomacy is a severe concern to developing countries like Sri Lanka. Beyond this, a strategic-trap is another dimension to consider in many other BRI nations that could fall into the same political-economic crisis as Sri Lanka.

(Asanga Abeyagoonasekera is an International Security and Geopolitics Analyst and Strategic Advisor from Sri Lanka. He serves as a Senior Fellow at the Millennium Project in Washington DC. He was the former founding Director-General of the National Security Think Tank under the Ministry of Defence Sri Lanka and former Executive Director at the government Foreign Policy think tank LKI. His recent book is ‘Conundrum of an Island’ (2021).)

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