Sri Lanka Leases Hambantota Port to China: Is this the Beginning of Chinese Debt Trap in South Asia?

Hambantota Port.jpg

Terms such as creditor imperialism, debt-trap diplomacy, modern ‘Thucydides Trap’, “Land of Morning Warning” are making the rounds lately. These terms all refer to China, whose rise is being curiously watched and debated time and again in geopolitical circles. Concerns about Chinese regional machinations have been trending for a while now, but recently Beijing appears to have adapted a new, more subtle strategy for bolstering its influence in South Asia.

Last month, Sri Lanka handed over its strategic port of Hambantota to China on a 99- year lease. This comes seven years after Sri Lanka opened this port using debt from Chinese state-controlled entities. Colombo’s failure to repay its debt led China to strike a deal to control 80 per cent stake in the port. The port sits on the southern coast of Sri Lanka, providing China access to critical Indian Ocean sea lanes. This has further helped China’s “One Belt and One Road” Initiative in South Asia, thereby raising concerns for countries with strategic interests in the Indian Ocean Region (IOR). Many see Sri Lanka as the latest victim of China’s debt-trap diplomacy – a policy allegedly using economic tools to advance country’s geopolitical interests.

Scholars point to a pattern in Chinese investments and soft loans. China makes huge loans to infrastructure projects in “strategically located developing countries”. These projects are built on Chinese money (at a very high cost), largely employing Chinese workers and are meant to open markets for Chinese goods, and as mostly observed they often fail to generate expected revenue. These projects not only serve China’s economic interests but also carry strategic benefits. Unlike, the IMF and World Bank which lend soft loans at interest rates of 0.25 to 3 percent, loans from China come with an interest rate as high as 6.3 percent. Unable to pay off their debt to China, many nations sell stakes in Chinese financed projects or end up giving access to their strategically important natural assets including ports and mineral resources. At times, in lieu of rescheduling payments, China secures contracts for new projects – this keeps the recipient country trapped in a vicious cycle of never-ending debt.

Globally, China has been accused of using similar tactics in Greece (Piraeus port), Australia (Darwin port), Kenya (Mombasa port and the new SGR line), Djibouti (China’s first overseas military base) and other countries in similar need of investment. It is not difficult to guess the blueprint here. Many of these countries are experiencing economic slowdown or are cash-strapped; they also lack recourse to alternate institutional investments; and possess strategically important economic/natural assets that can fit neatly into China’s One Belt, One Road project.

Several countries in South Asia are also witnessing a similar trajectory. Many experts expect Pakistan’s Gwadar port (part of China-Pakistan Economic Corridor), Sri Lanka’s Hambantota port, Maldives-China Free Trade Agreement and Chinese loans to Bangladesh to meet with similar fate.

In Pakistan, China is spending more than US$ 55 billion, mainly comprised of loans. Earlier, there were also demands for transfer of ownership and to use renminbi as legal tender in Gwadar city, which were rejected by Pakistan. According to the Gwadar port revenue sharing and control agreement, China Overseas Ports Holding Company will receive 91 percent share of the revenue while only 9 percent will go to Gwadar Port Authority for the next 40 years. It doesn’t stop at that – for next 20 years Pakistan would have to make repayments worth US$3.5 billion every year for loans taken under CPEC. According to one estimate, CPEC loans will add US$14 billion to Pakistan’s total public debt, totaling it to US$90 billion by June 2019. Hence, Pakistan’s ability to repay Chinese loans is severely under question, raising concerns whether Pakistan might fall prey to Chinese debt trap diplomacy.

In the case of Sri Lanka, the total external debt stands at US$64.9 billion, of this US$8 billion is owed to China. Sri Lanka borrowed US$301 million for the Hambantota port at an interest rate of 6.3 percent which because it was unable to repay, had to be leased out in a debt-equity swap. Additionally, China has also taken over the operating and management control of Mattala airport due to Sri Lanka’s inability to bear annual expenses. The airport is built by Chinese loans of more than US$ 300 million. Both of these serve China’s strategic military interests and are a grim reminder of Chinese debt trap at play.

At a recent meeting of the SinoBangladesh Joint Economic Council, China proposed to convert soft loans offered during Xi Jinping’s 2016 visit to Dhaka into commercial credit. If implemented, this is going to incur higher interest rates on Bangladesh. So far, Bangladesh and China have signed deals worth US$25 billion comprising of 34 projects.

In 2017, China pledged the highest investment in Nepal at US$ 8.3 billion. These include grants, interest-free loans and concessional loans. China has projects in many sectors such as agriculture, tourism, manufacturing and hydropower. The Chinese capital invested in these projects comes with conditions. They decide who works (preferably their own labor and technicians), and how the money is utilized. There are also fears of compromise over Nepal’s sovereignty – Chinese companies suggested to place PLA troops near dams to protect their investments. In November last year, both Nepal and Pakistan withdrew from two dam building deals with China due to dissatisfaction over inequitable terms of their deals[S1] .

However, there are other viewpoints that argue that these warnings may be exaggerated. In the case of Sri Lanka, much of the debt has accumulated as a result of the large scale and extremely expensive infrastructure projects undertaken during the Rajapaksa government. At the same time, Chinese investments could potentially result in good domestic growth ; China-Pakistan Economic Corridor is a salient case-in-point.

Whether South Asia will succumb to China’s debt-trap diplomacy or not remains to be seen. However, it cannot be ruled out that insurmountable Chinese debt in smaller countries will allow China’s leverage in those countries to increase. At the same time, failure to repay debt in time will continue to result in loss of access to important assets and natural resources. Thus, while developing countries are willing to accept Chinese loans, they should be aware of the risks that accompany them.