How the Rajapaksa clan and Chinese loans are putting Sri Lanka on the highway to economic collapse

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CIA chief Bill Burns rightly defined the reason for Sri Lanka’s current economic crisis. Burns says Sri Lanka has made stupid bets on China, and when you look at Sri Lanka’s financial history, you find his statement has elements of seriousness.

In fact, China was not alone. It was the combined Rajapaksa-China push that forced Sri Lanka to see the day when public protests after economic collapse forced the fall of the Gotabaya Rajapaksa government. The people of the nation are so angry that they are not even ready to accept the next government and its president Ranil Wickremesinghe as he is considered to be very close to the Rajapaksa clan.

The Rajapaksa clan, which has ruled Sri Lanka since 2005, first wanted to make the country another Singapore, then a financial power like Dubai. He saw China’s easy loans as a quick fix to his dreams of infrastructure and greener pastures, while easily forgetting that Sri Lanka’s imports vastly exceeded its exports and that he needed money. ‘a safe zone of foreign currency reserve to remain economically viable whenever it has experienced hard times as has happened with the Covid crisis. The pandemic has hit the country hard, hitting its two main sources of foreign currency, tourism and remittances, leading to economic default.

In the name of modernizing the country to become a model of infrastructure, the Sri Lankan government led by the Rajapaksa clan began to develop the southern province, even as the western province with the capital Colombo was considered the political and financial core of the country.

Hambantota district in the southern province is the birthplace of the Rajapaksa clan and Mahinda Rajapaksa wanted to transform the city into the next Colombo, the next political and financial hub, even though feasibility studies did not allow such projects.

Built with a lot of hype, the projects ultimately turned out to be absolute financial disasters. Clearly, the Sri Lankan approach under the Rajapaksas can be boiled down to “dumb bets”, as Burns puts it. His reaction actually captures the gist when he views heavily indebted Chinese investments as a major factor in Sri Lanka’s economic collapse.

The chart above clearly puts the economic crisis into perspective of what went wrong. The graph contains data from 2005 to 2011 from the World Bank and the Central Bank of Sri Lanka from 2012. The Rajapaksa clan, which has become more or less a political dynasty now with dozens of family members and relatives in government posts when he was in power, had his first relative, Mahinda Rajapaksa, as president of Sri Lanka in 2005.

Its main objective was to end the Sri Lankan civil war with the Tamil militant group LTTE. For this, Sri Lanka needed military support in the form of arms and ammunition and foreign currency to purchase lethal weapons from other countries. No country, including India, has come forward to help Sri Lanka obtain lethal weapons except China.

During these four years of civil war under the regime of Mahinda Rajapaksa, Sri Lanka’s gross external debt increased by 72%, from $11.3 billion in 2005 to $19.5 billion in 2009, the year of the decisive victory over the LTTE.

Buoyed by victory in the civil war that had crippled the life of the island nation for decades, the next step for Mahinda Rajapaksa was to make Sri Lanka an economic powerhouse like Singapore. He needed financial support for this, which was not available in his country torn apart by decades of civil war.

Mahinda Rajapaksa found a solution with China again coming to help. But Beijing has come up with its own plans to push China’s economic settlement in Sri Lanka under its Belt and Road Initiative (BRI). The country certainly needed infrastructure growth, but China even lobbied for projects that were expected to be commercially unviable in the long term, such as the deep-sea port of Hambantota and Mattala Airport in Hambantota District.

Both of these projects are white elephants, generating no significant revenue. Hambantota port actually came under Chinese control for 99 years in 2017 after Sri Lanka failed to pay the $1.4 billion bill. China also gained control of 15,000 acres of land surrounding the airport. This was the first success of China’s economic colonization process in Sri Lanka.

Mattala International Airport, with a capacity of one million passengers per year, is also called the emptiest airport in the world. It was opened for operations in March 2013. According to Sri Lankan media, sometimes the airport is not even able to earn enough to pay its electricity costs. The striking point is the fact that the $210 million airport was built using high-interest commercial loans from China. Government-to-government loans from China to Sri Lanka carry an interest rate of 2%, but commercial loans come at much higher interest rates.

Hambantota also saw the opening of an international connection center in November 2013, another investment from a Korean loan that did not generate any income.

While the two major projects mentioned above have already failed, the Rajapaksas and China have decided to build another, an artificial island built on 269 hectares of land reclaimed from the sea. Lent and built by China and called Sri Lanka’s economic game-changer, the Colombo Port City project is set to be China’s next economic colonization success story in Sri Lanka, as the country has already defaulted on its debt.

Under Gotabaya Rajapaksa, Sri Lanka passed the Colombo Port City Economic Commission Bill in May 2021. The legislation gave China absolute authority over an area just 700 km from Chennai in India. Opposition parties in Sri Lanka have alleged that the bill seeks to undermine the country’s sovereignty and create a Chinese colony. The Supreme Court of Sri Lanka, while hearing petitions against the bill, also declared certain provisions of it to be unconstitutional. China can launch its own currency in the Colombo Port City area.

WHY THE CHINESE LOAN IS THE MAJOR FACTOR

According to the External Resources Department (ERD) of the Sri Lankan government, 47% of Chinese loans are in the form of borrowings on external markets. Sri Lanka in 2007 started issuing international sovereign bonds to obtain loans in global financial markets. These market borrowings are generally short-term loans, with a lifespan of 5 to 10 years, and carry a higher interest rate, around 6%. 13% of Sri Lankan loans come from the Asian Development Bank. China and Japan, according to government data, are in third place with 10% of loans.

But when we go into the details, we find that Chinese loans constitute a much higher proportion of Sri Lankan loans. According to a press analysis published in The Diplomat, China accounted for 20% of Sri Lankan loans at the end of 2021. Of this 20%, 14% were Chinese debt securities while 6% were term loan facilities. .

If we correlate this figure with Sri Lanka’s current gross external debt, it stands at $10.144 billion, of which $3 billion is in the form of term loan facilities. Most of this loan amount from China came after 2005 and this can be confirmed by an official statement from the Sri Lankan government. According to ERD, “the amount of loan funds obtained from China from 1971 to 2004 was very marginal and it increased considerably after 2005”.

Over the past 16 years, Sri Lanka has taken out loans worth $40 billion, almost a quarter of that from China. Certainly, Sri Lanka needs infrastructure projects to boost the country’s economy, but the failure of large-scale infrastructure projects loaned and built by China has actually overshadowed any positive effect on other projects. as well, especially when the country was hit hard by the pandemic. .

CHINESE APPROACH AND $25 BILLION CALCULATION ERROR

China’s easy approach to steady loan requests from Sri Lanka and its promise to build massive infrastructure projects to change Sri Lanka’s destiny have made Mahinda Rajapaksa’s government overconfident. He also began pushing for loans from other sources, mostly in the form of short-term market borrowing or ISB.

These market borrowings now cost nearly half of Sri Lanka’s total lending, at $25 billion. In January 2022, Sri Lanka somehow paid off a $500 million bond when it came due. The country had to pay $1 billion in bonds this month, but defaulted in May and had to suspend further debt repayments.

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