The government of Sri Lanka early this month declared bankruptcy, saying that it cannot pay its external debts of more than US$50 billion. Former Sri Lankan president Gotabaya Rajapaksa fled the country before resigning his post, while Ranil Wickremesinghe has stepped down as prime minister.
The country of more than 22 million was in September last year plunged into its worst economic crisis since it gained independence in 1948, as its foreign exchange reserves dried up and energy, food and medicine became scarce. There has been no end to the crisis, despite months of popular protests. The country’s inflation rate reached 54 percent, making daily life intolerable for the public. On July 9, protesters occupied the president’s official residence and set fire to the prime minister’s private residence.
The main causes of Sri Lanka’s economic collapse are bad economic policies and mismanagement. Tourism, which had been the country’ main source of foreign exchange, was affected by 2019 Easter bombings. Over the past two years, the industry has been further hit by the COVID-19 pandemic, causing a severe decline in Sri Lanka’s foreign exchange earnings.
In addition, government debt and Russia’s invasion of Ukraine have led to higher energy and food prices that have further deepened the crisis. Sri Lanka on May 19 announced its first sovereign debt default since independence. Tired of the economic turmoil, Sri Lankans took to the streets of the capital, Colombo, in protests that blew up into a political crisis.
The Rajapaksa dynasty and the corruption surrounding it are the main culprits. In 2009, Rajapaksa’s elder brother, then-Sri Lankan president Mahinda Rajapaksa, defeated the Liberation Tigers of Tamil Eelam in a brutal military campaign, thus ending the civil war with the armed group, which was fighting for the Tamil ethnic minority’s independence. Mahinda Rajapaksa was hailed as a war hero and won the support of the ethnic majority Sinhalese. The brothers have served as president and prime minister, while their relatives have also served as lawmakers, and as defense and foreign ministers. They have established a political dynasty that monopolized political power for many years, during which they have been accused of using state violence to suppress political and social dissent.
The Rajapaksas are basically socialists who are keen on launching big public infrastructure projects while maintaining close diplomatic relations with China. These political leanings have led their country, which had been in a reasonably good economic situation, into the debt trap of China’s Belt and Road Initiative. In a dramatic turnaround, family politics kept them in power for a while, but in the end their corruption and incompetence has led to their ouster.
The investment and construction partnership between Sri Lanka and China started long before the Belt and Road Initiative. Sri Lanka occupies a strategic location at the southeastern edge of the Indian subcontinent. Consequently, China appreciated Sri Lanka’s geostrategic importance in relation to India and declared it to be a vital link in its “21st-century maritime Silk Road.” China and the Rajapaksa dynasty invested heavily in the maritime plan, including the establishment of special economic zones, industrial parks, container terminals, airports, highways, power plants, and other development and construction projects.
Similar to other countries involved in the Belt and Road Initiative, Sri Lanka’s rulers brought in Chinese capital and construction power, initially perhaps with some consideration for improving public infrastructure.
However, the Rajapaksas’ grandiose ambitions and poor planning led them to borrow heavily from China and invest the money in large-scale construction projects with no economic benefits. This resulted in too many big and flashy, but unsuitable and impractical “white elephant” projects that eventually saddled the country with heavy debt.
The New York Times called Sri Lanka’s Mattala Rajapaska International Airport “the world’s emptiest international airport” and reported that the nearby Hambantota International Port had been leased to China for 99 years.
The Rajapaksa family, in alliance with China, drove Sri Lanka straight into a debt trap, and condemned the nation to economic hardship, political autocracy and corruption. When people talk about failed Belt and Road Initiative projects, they often cite Sri Lanka as an example. The tragic scenes in Sri Lanka show where such policies can eventually lead.
There are indeed numerous examples of developing countries falling into the Belt and Road Initiative debt trap. Venezuela in South America, Uganda in Africa and Laos in Asia have all been forced to cover their debts by handing important resources or the operation rights to major construction projects over to China. The countries most dependent on Chinese capital — Djibouti, Tonga, the Maldives and Cambodia — are likely next in line.
In 2017, Indian geostrategist Brahma Chellaney was the first to warn countries about China’s “debt-trap diplomacy,” in which Beijing uses unsustainable loans to put the squeeze on poorer nations, eventually forcing them to cede strategic influence to China.
The administration of then-US president Donald Trump took the warning seriously and acted upon it. In November last year, British Secret Intelligence Service chief Richard Moore openly criticized China’s practice of acquiring key facilities in poor countries and using them to increase its influence.
Admittedly, infrastructure loans provided to developing countries by European and North American countries have also had some negative consequences, including “white elephant” projects, but the Belt and Road Initiative debt trap has some deeply Chinese characteristics. One of those is a lack of transparency, with nearly half of the loans being “off the books” and not reported to the World Bank or the IMF.
Worse, most such loans are provided by Chinese state-owned banks at high risk and high interest rates. If the borrowing country cannot repay its loans, Chinese banks often use their status as preferential creditors to obtain operation rights or other favorable conditions. As a result, the Belt and Road Initiative has been accused of using debt traps to engage in neo-colonialism and economic imperialism.
On the economic level, people might wonder whether China is assisting poorer countries with their development or behaving like a loan shark.
However, China does not always come out on top in such arrangements. It has been dragged into a trap of its own making as poor countries sink into economic difficulty and insolvencies become more common. When Sri Lanka sought an international emergency bailout, China faced the choice of whether to set a precedent by canceling Sri Lanka’s debt.
As the biggest single holder of poor countries’ debts, China has dug money pits for poor countries to jump into and has been dragged down after them. What better example could there be of falling into one’s own trap?
Translated by Julian Clegg
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