Economic crisis in Sri LankaThe reason is not Chinese debt but the policy adopted since 1977 in the name of liberalisation.
The debate on Sri Lanka and the China debt trap has been going on simultaneously for a few years in academia, international politics and the media. For the Western and some sections of the Indian media, it seems the current Sri Lankan economic crisis has become another opportunity to set the narrative of China's debt trap. Most Western outlets prove that China is the main culprit. In Nepal, most of the intellectual discussion is focused on the narrative of the Chinese debt trap. To some extent, the concern seems to be genuine, considering that Nepal's current position on this subject matter forced us to study the ongoing Sri Lankan crisis while implementing Belt and Road Initiative (BRI) projects.
There are several reasons that we need to look at. First and foremost, Nepal is desperately eager to establish a grandiose infrastructure project. And to accomplish such a scheme, China is coming forward with financial support. The second reason is the nature of our economy, which is based hugely on tourism and remittances. A crisis in this sector means creating havoc in the country's entire economy. Third, the nature of foreign debt in both countries is increasing day by day. In this context, if we examine the current Sri Lankan crisis, it will be an important lesson for Nepal. But to get an actual orientation of the current economic situation in Sri Lanka, we have to avoid the Western and Indian media articulation to some extent.
Sri Lanka has two sources of foreign currency—tourism and remittances. Tourists stopped coming after the 2019 Easter bombings. At the beginning of 2020, a ray of hope had emerged in Sri Lankan tourism, but Covid-19 ruined everything. At the same time, donor pressure to make instalments and interest payments became another burden to the Sri Lankan government. Currently, two-thirds of all revenue collected by the government goes into paying interest on foreign debt. The Sri Lankan government committed another blunder by printing more money to pay off internal debt, which led to inflation. The government of the Rajapaksa brothers implemented a policy of tax exemption which led to over-exploitation of the national treasury that eventually pushed Sri Lanka into its current mess.
Chinese debt trap
The controversy over Beijing's BRI in some South Asian countries is a well-known subject. Chinese debt has skyrocketed in Sri Lanka, particularly after Sri Lanka signed the BRI agreement in 2014. BRI loans made it possible to build ambitious Sri Lankan projects like Mattala Rajapaksa International Airport and Hambantota Port, but they could not even earn their operating expenses. The Sri Lankan government then handed over Hambantota Port to a Chinese company for 99 years. As a consequence, the term ''debt trap diplomacy'' came into vogue.
But a report by British think tank Chatham House says that Indian political commentators created a buzz by making baseless comments to devise anti-China rhetoric. The study shows that the Chinese debt was not as bad as advertised. They have five reasons to support their argument. Initially, the Hambantota Port project was not proposed by China; it was Sri Lankan Prime Minister Mahinda Rajapaksa who did that. The weakness of the Sri Lankan side was its willingness to take loans for ambitious projects without understanding the economic potential. Second, the project was a purely economic one, not a geopolitical one. Third, Sri Lanka's debt crisis is not directly linked to Chinese debt. The situation came to light mainly due to borrowings from Western capital markets and Sri Lanka's internal economic turmoil.
Fourth, it does not prove that the loan was given to capture the physical infrastructure. The money paid by the Chinese company to lease the port appears to have helped Sri Lanka pay off its loan instalments or interest. Fifth, the Chinese navy does not appear to be able to use the port, but the Sri Lankan military can use the structure if it so chooses. Despite this, the "Chinese debt trap" continues to spread in the Western and Indian media. It is unquestionably true that ambitious projects built by China under the BRI have failed to produce results. We can say it might be a debt trap or not, as reported by Chatham House. But the current economic crisis in Sri Lanka is not only due to the Chinese debt under the BRI because the contribution of Chinese debt to the current crisis is trivial. As of now, China accounts for 10 percent of Sri Lanka's foreign debt.
Liberalisation gone sour
After independence from Britain in 1948, Sri Lanka was expected to become South Asia's economic powerhouse due to its strategic location in the Indian Ocean. Singapore made an unimaginable economic leap by utilising its strategic location for maritime trade, but Sri Lanka failed to do so. Instead, it was engulfed in ethnic conflict. A valuable period was lost suppressing the Tamil rebellion, which was crushed in 2009. In 1997, Sri Lanka became the first South Asian country to adopt economic liberalisation. Initially, it experienced rapid economic growth, but the war escalated, which slowed down the country's economy. Effective plans like poverty reduction and social security also slackened, which were its achievements before liberalisation. Sri Lanka borrowed large amounts from the World Bank, Asian Development Bank, International Monetary Fund, Japan, the United States and the European Union.
According to the data available on the website of the Department of External Resources of Sri Lanka, the largest share of Sri Lanka is in external bonds. Such bonds are mostly purchased by Western companies or banks, and a large share comes under Americans and Europeans. At present, the share of debt from market borrowings in Sri Lanka has reached 47 percent of the total debt. While the Asian Development Bank’s debt stands at 13 percent, and Japan's at 10 percent. The World Bank's debt stands at 9 percent, and China's share of the debt is still 10 percent. As of April 2021, Sri Lanka's total foreign debt exceeded $35 billion. On which it paid approximately $460 million every month as interest on the loan.
Therefore, the root of Sri Lanka's current economic crisis is not Chinese debt but the economic policy adopted since 1977 in the name of a liberal economy. Sri Lanka's experience could be a lesson for Nepal as it seeks to accelerate economic growth by borrowing from the World Bank, Asian Development Bank or other donor agencies or countries.