How the Rajapaksa clan and Chinese loans put Sri Lanka on the fast track to economic collapse

CIA chief Bill Burns has correctly defined the reason behind Sri Lanka’s current economic crisis. Burns says that Sri Lanka made foolish bets on China, and when we look at Sri Lanka’s financial past, we find that his statement has elements of gravity.

Indeed, China was not alone. It was the combined Rajapaksa-China push that forced Sri Lanka to see this day when public protests after the economic collapse forced the fall of the Gotabaya Rajapaksa government. The people of the nation are so angry that they are not willing to accept even 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 and then a financial powerhouse similar to Dubai. He saw easy loans from China as a quick fix for his dreams of infrastructure and greener pastures ahead, while easily forgetting the fact that Sri Lanka’s imports were significantly higher than its exports and he needed a safe zone of foreign exchange reserves. to remain economically viable as long as necessary. faced some difficult moments as it happened with the Covid crisis. The pandemic severely affected the country, hitting its two main generators of foreign exchange, tourism and remittances, causing an economic default.

In the name of upgrading the country to become a role model in infrastructure, the Sri Lankan government led by the Rajapaksa clan began developing the southern province, even as the western province with the capital Colombo was considered the political core. and finance of the nation.

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

Built with much hype, the projects ultimately turned out to be outright financial disasters. Clearly, the Sri Lankan approach under the Rajapaksas can be summed up as “foolish gambling”, as Burns puts it. His reaction, in fact, gets the gist when he counts high-debt Chinese investments as a major factor behind Sri Lanka’s economic collapse.

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

Its main objective was to end Sri Lanka’s civil war with the Tamil militant group LTTE. For that, Sri Lanka needed military support in arms and ammunition and foreign exchange to buy lethal weapons from other countries. No country, including India, has offered to help Sri Lanka obtain lethal weapons, except China.

During those four years of civil war under the Mahinda Rajapaksa regime, Sri Lanka’s gross foreign 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 paralyzed life in the island nation for decades, Mahinda Rajapaksa’s next step was to turn Sri Lanka into an economic powerhouse like Singapore. He needed financial support for this, which was not available in his nation torn apart by decades of civil war.

Mahinda Rajapaksa found a solution with China again coming to help. But Beijing came up with its own designs to boost China’s economic colonization of Sri Lanka under its Belt and Road Initiative (BRI). The country certainly needed infrastructure growth, but China even pushed through projects that were expected to be commercially unviable in the long run, such as the Hambantota deepwater port and the Mattala airport in Hambantota district.

Both projects are white elephants that do not generate significant income. In fact, the port of Hambantota was 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. It was the first success story of China’s economic colonization process in Sri Lanka.

Mattala International Airport, with the capacity to handle one million passengers a year, is also known as the world’s emptiest airport. It opened for operations in March 2013. According to Sri Lankan media reports, sometimes the airport cannot even earn enough to pay for the cost of electricity. The surprising point is the fact that the $210 million airport was made with high-interest commercial loans from China. Government-to-government loans from China to Sri Lanka carry an interest rate of 2%, but commercial loans are given at much higher interest rates.

Hambantota also saw the opening of an international hub in November 2013, another Korean loan investment that has not generated any revenue.

While the two big projects mentioned above have already failed, the Rajapaksas and China decided to build another, an artificial island built on 269 hectares of reclaimed land. Borrowed and built by China and called Sri Lanka’s economic game changer, the Colombo port city project is expected to be the next success story of China’s economic colonization of Sri Lanka with the country having already breached debt payments.

Under Gotabaya Rajapaksa, Sri Lanka passed the Colombo Port City Economic Commission Bill in May 2021. The legislation gave China absolute authority in an area that is only 700 km from Chennai in India. Opposition parties in Sri Lanka claimed that the bill was intended to undermine the country’s sovereignty and create a Chinese colony. The Sri Lankan Supreme Court, while hearing petitions against the bill, also said that certain provisions of the bill were unconstitutional. China can launch its own currency in the area of ​​the port city of Colombo.

WHY THE CHINESE LOAN IS THE MAIN FACTOR

According to the External Resources Department (ERD) of the Sri Lankan government, 47% of Chinese loans are loans from the external market. Sri Lanka, in 2007, began issuing international sovereign bonds to take advantage of loans from global financial markets. These market loans are usually short-term loans, with a useful life of 5 to 10 years, and have a higher interest rate, around 6%. 13% of Sri Lankan loans are from the Asian Development Bank. China and Japan, according to government data, rank third with 10% of loans.

But when we dig into the details, we find that Chinese loans make up a much larger proportion of Sri Lankan loans. According to a news 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 shares, while 6% were term loans.

If we correlate this figure with Sri Lanka’s current gross external debt, it comes out to be $10.144 billion with $3 billion in the form of term loan facilities. Most of this loan amount from China occurred after 2005 and 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 increased significantly after 2005.”

In the last 16 years, Sri Lanka has borrowed $40 billion worth of loans and nearly a quarter of that is from China. True, Sri Lanka needs infrastructure projects to boost the country’s economy, but the failure of large-scale infrastructure projects borrowed and built by China has in fact overshadowed any positive effects on other projects, especially when the country was hit hard. for the pandemic. .

THE CHINESE APPROACH AND THE $25 BILLION MISTAKE

China’s easy approach to regular Sri Lankan loan requests and its promise to build massive infrastructure projects to change Sri Lanka’s destiny made Mahinda Rajapaksa’s government overconfident. It also began to push for loans from other sources, mainly in the form of short-term market loans, or ISBs.

These market loans now cost nearly half of Sri Lanka’s total loans, 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 bond payments this month, but defaulted in May and had to suspend more debt payments.

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