Sri Lanka Has a Debt Problem, But It’s Not Due to China
Last April, as a result of the soaring food and fuel prices, compounded by the effects of the Corona pandemic, Sri Lanka was forced to default on payment of foreign bonds, and the Central Bank shortly thereafter declared the country in a preemptive default. For many months before that, the government had been unable to provide the foreign currency to continue financing vital imports, triggering a mass protest movement, which led to the resignation of the President and PM on July 9.
Western think tanks and mainstream media have long blamed the country’s crisis on China, citing the development of the Hambantota Port as the most flagrant example of “China’s debt trap diplomacy”. However, research carried out by EIR’s Hussein Askary, using various official reports published since 2019, shows that the narrative of China being the source of Sri Lanka’s debt is fake through and through.
Consider first of all that China only holds 10% of the external debt. So who owns the rest? According to government statistics, in April 2021, the composition (in percentage) was as follows:
- International capital markets borrowing: 47%
- Asian Development Bank: 13%
- China: 10%
- Japan: 10%
- World Bank: 9% with various others accounting for the remaining 11%.
The four main causes of the crisis are:
- Excessive borrowing in international bond markets, mainly from Western financial investors such as the American and British giants BlackRock and Ashmore. constitute the greatest part of the external debt of the country (47%). It was the scramble to repay some of this debt, that matured in 2017, that pushed the Sri Lankan government to offer the Hambantota Port for leasing. China took up the offer in return for ca US$ 790 million – money that was used to repay the debt to the international markets, not to China.
- The trade deficit: Sri Lanka has a major dependency on imports of oil and gas and their refined products for transport and power generation and prices have soared. In addition, the country’s main exports are textiles and garments, but the raw materials and machinery to produce them are imported. Chemical fertilizers constitute another important item of imports. The total cost of imports doubled (in dollar terms) from 2020 to 2021.
- Collapse of tourism sector due to terrorism (in particular the attacks in April 2019) and the COVID-19 pandemic. Two figures paint the picture: in 2018, 2,333,796 tourists visited Sri Lanka, while that figure plummeted to 194,495 tourists in 2021, with a corresponding plunge in income.
- Decline of Remittances: As a result of the effects of the COVID-19 on the global service sector, where Sri Lankan foreign workers are generally employed, the remittances declined by nearly 30% from 2020 to 2021.
The only way out for Sri Lanka is to develop its real economy, with investments in infrastructure, industry and modern agriculture. The West should contribute to that, rather than criticizing China for offering cooperation in the Belt and Road Initiative.
Read the full article by Hussein Askary here.