For China, aid to Sri Lanka does not constitute a ‘debt trap’
Posted on December 5th, 2022

by Arundathie Abeysinghe Courtesy PIME Asia News

According to a recent study, China is Sri Lanka’s top international creditor with debt largely owed to two Chinese state-owned banks. Concerns remain over China’s geopolitical ambitions in the region. A US$ 2.9 billion IMF aid package to Sri Lanka is still pending.

Colombo (AsiaNews) – China has reiterated that no political strings are attached to its aid to Sri Lanka and that it does not seek such influence with investments and financing in the island nation.

To this end, Beijing welcomed a recent statement by Sri Lankan Foreign Minister Mohamed Ali Sabry, who rejected the narrative of China’s alleged “debt trap” vis-à-vis Sri Lanka.

China fully relates to the difficulties and challenges faced by Sri Lanka and supports relevant financial institutions in discussing with Sri Lanka and properly resolving them,” reads a statement from China’s Foreign Ministry. We have all along provided support to Sri Lanka’s socioeconomic development as our ability permits,” it adds.

In 2020, Sri Lanka received a US$ 3 billion soft loan from China to help repay existing debts.

Alternatively, it would have had to restructure its debt through the International Monetary Fund (IMF) and adopt austerity measures as prescribed by the Paris Club, an informal group that brings together the main creditor countries in the world.

However, as political analysts explained to AsiaNews, China is one of the main players in Sri Lanka’s economic catastrophe.”

According to the China Africa Research Initiative (CARI) at Johns Hopkins University School of Advanced International Studies, China is Sri Lanka’s first foreign creditor.

Sri Lanka owes Chinese lenders US$ 7.4 billion, almost a fifth of its total foreign debt in 2021. The other major lenders are the Asian Development Bank, the World Bank, Japan, and India.

According to CARI, the Export-Import Bank of China (EximBank) and China Development Bank are the two largest Chinese lenders, respectively for US$ 4.3 and US$ 3 billion.

Critics note that Sri Lankan authorities have used Chinese loans primarily for “white elephants”: large infrastructure projects, including the port of Hambantota, that have proved unprofitable if not useless.

According to several observers, when the Sri Lankan government proved unable to repay its debts, the port was effectively ceded to Chinese control.”

Although CARI partially challenges this view, it is nevertheless clear that there is widespread fear in Sri Lanka that China wants to turn the debt into geopolitical “influence”, starting with its first naval foothold in South Asia.

Conversely, some Sri Lankan scholars note that China plays a significant role in restructuring the country’s debt.

The crisis-hit island started discussions with creditors in September this year. Meanwhile, a US$ 2.9 billion loan negotiated with the IMF is still on hold, waiting for guarantees from foreign lenders.

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