May 28, 2024

Five years after it acquired Hambantota, China is learning cash has bought neither profit nor power in Sri Lanka

6 min read

Photo of China national flag with modern skyscrapers in the background

By Praveen Swami

Eleven hundred feet over the Colombo skyline, the giant, hot-pink lotus thrusts out of its green metal stem. Financed with almost $100 million in loans from China, the Nelum Kuluna tower was to be the tallest building in all South Asia, housing luxury hotel rooms, conference halls, shopping malls, and the infrastructure needed to power digital television networks. From the top of the Nelum Kuluna, visitors could see a great jungle of cranes and dredgers at work, raising an entire city from the sea.

The tower is empty, a monument to the ruin of a nation. The new city near it will almost never rise from the mud. The $190-million international airport meant to serve the city hasn’t had a scheduled flight since 2018. Elephants roam the area, and the main access road is used by villagers to dry pepper.

“I tell you, money can’t build your spire,” William Golding wrote in his 1964 masterpiece, The Spire, which tells the story of a hubris-driven cleric determined to raise a steeple from a cathedral with no foundations. “Build it of gold, and it would simply sink deeper.”

The surreal disintegration of Sri Lanka’s economic and political system marks a disaster for Chinese President Xi Jinping’s Belt and Road Initiative (BRI), designed to grow China’s power across Asia and Africa. For New Delhi, this is an opportunity—but also a nightmare. Fears are mounting that Sri Lanka could join the long list of failing States on India’s peripheries—Afghanistan, Pakistan, Nepal and Myanmar. New Delhi has pumped almost $4 billion in soft loans and aid—but it knows this isn’t a long-term solution.

In the crumbling of China’s dreams in Sri Lanka, there’s a warning for India: The land of white elephants is full of hidden swamps, in which good intentions and hard cash can disappear without trace.

The Dragon’s Treasure

Even as he drove Sri Lanka towards triumph in the Eelam War, former president Mahinda Rajapaksa initiated a giant programme to extricate his country from the economic morass engendered by years of conflict. The country’s traditional multilateral lenders had tightened norms since 1997, when Sri Lanka was deemed to have become a lower-middle income nation. Few private-sector investors were willing to risk their cash betting on a war-torn nation, either.

From 2005-2010, economists Umesh Moramudali and Thilina Panduwawala have estimated, China released some $1.4 billion in loans for infrastructure—overlooking matters like project-viability norms and social impacts. In the period from 2011-2015, as repayments became due, China rescheduled Sri Lanka’s debts and threw in another $3.1 million.

The country needed 16 International Monetary Fund (IMF) bailouts since 1965. Now China seemed to offer an alternate lifeline, free from tough policy-reform conditions.

China’s spending, some argue, was underpinned by a larger plan to develop web of client states across the Indian Ocean, running from Cambodia’s Ream port to Djibouti. There is reason to be sceptical, though, of claims this was China’s primary motivation.

“Foreign policy experts,” writes Jonathan Hillman in his authoritative book, The Emperor’s New Road: China and the Project of the Century, “occasionally see strategy where none exists.” “Eager to support Xi’s signature vision, Chinese officials approved loans for projects without adequate due diligence. Chinese firms were eager to build the projects and would get paid regardless of their commercial viability,” he added.

“Everyone took something for themselves, eagerly and without much care for the longer-term repercussions. It was chaotic, not strategic,” Hillman further said.

The Game of loans

Like Roman god Janus, Sri Lanka’s leaders looked both East and West at the same time— from early in its post-independence history, the country had learned to leverage great power geopolitical competition. Fearing his Marxist opponents, then prime minister Don Stephen Senanayake allowed the United Kingdom to retain its naval base in Trincomalee, and a presence at Katunayake airport, near Colombo. In 1952, though, he also began trading with China, bartering rubber for rice.

Even though China was cash-strapped, it also provided more than $41 million to Colombo by 1968. China scholar George Lerski noted in a 1974 essay that the country became Sri Lanka’s “most reliable source of loans and grants.”

For its part, the Soviet Union also stepped in to compete for geopolitical influence on the island. In 1956, after the neutralist government of prime minister SWRD Bandarnaike took office, Moscow provided some $24 million in soft loans to finance several industrial projects. Following the nationalisation of United States oil company assets in 1962, Soviet-bloc aid escalated significantly, crossing $50 million.

The government of Dudley Senanayake, which took power in 1965, turned West again. The United States responded by assembling a coalition, which extended loans of $50 million.

From 1970, Sri Lanka lurched Left. Now, China sought to contain Soviet influence in the region, offering Sri Lanka a $27 million loan. In the summer of 1972, just one month after Sri Lanka failed to secure a bailout from the IMF, China gave the country an interest-free $40 million loan, repayable over 20 years.

Land of white elephants

Long before the new tide of Chinese investment washed over Sri Lanka under Mahinda, it was clear the projects he was promoting had weak foundations. In the 1970s, Mahinda’s father, Don Alwin Rajapaksa, had called for a port to be built in his home district, Hambantota. In 2003, Sri Lanka had rejected proposals by the Canadian engineering firm SNC Lavalin to explore this idea. The SNC Lavalin plans were—correctly—determined to involve excessively optimistic assumptions.

Even though regime-linked cronies are reported to have profited from port-construction contracts, Hambantota did little for Sri Lanka. The port never came close to achieving the traffic projections it was based on. And the promise that it would generate over 100,000 jobs proved a chimera.

Financing Sri Lanka’s foreign debt—the bulk of it commercial market borrowings—was meanwhile becoming increasingly challenging. The ratio of debt to gross domestic product spiralled from 36 per cent in 2010 to 94 per cent by 2015—and over 110 per cent last year.

To help its debt repayments, Sri Lanka found itself compelled to grant a 99-year lease on the port to China Merchants Port in 2017, in return for an $1.1 billion. The government used that money, until its recent bankruptcy, to service debts to China, and other lenders.

Even as Hambantota floundered, China announced its largest single investment in Sri Lanka. The Colombo Port City project was inaugurated in 2014 by president Xi, the year after he launched the Belt and Road Initiative to build road, rail and maritime infrastructure across Asia. The project was intended to become a financial centre to rival Dubai and Singapore, complete with homes for 80,000 people and a marina.

For a 99-year lease on 43 per cent of the land, the China Harbour Engineering Corporation was to sink in the estimated $1.4 billion needed to build the project. But Sri Lanka, already drowning in debt, would have to raise the $1 billion needed for roads and infrastructure.

In March 2015—a week before a State visit by Prime Minister Narendra Modi—President Maithripala Sirisena’s new government put the Port City project on hold. He was forced to back down, Karthik Sivaraman has shown, because of unsubtle arm-twisting by Beijing.

Five years after it acquired Hambantota, though, China is learning cash hasn’t bought it either profit or power. Leaders across the region, who eagerly signed up for Xi’s BRI cash, will be wondering if it might lead them to the fate of Sri Lanka’s ruler.

Even if it wished to, though, India can’t match China’s treasure. Instead, it needs to work with partners like the United States and Japan, to expand support for vulnerable regional states. And it must grow regional trade, laying the foundations for sustainable prosperity across South Asia. The ruins of Sri Lanka’s white elephants could mark a turning point in South Asia’s relationship with China—but to seize the opportunity, New Delhi will need to show it has vision.

(Courtesy of ThePrint. The author is National Security Editor, ThePrint. He tweets @praveenswami. Views are personal.)

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