Indebtedness to China has obliged Sri Lanka to hand over a major port to its financier. Is this an emerging pattern in Asia? Nikkei staff writer Yuji Kuronuma reports. 

Hambantota Port

When Sri Lanka handed over its southern port of Hambantota to China in December 2017, many saw the episode as a cautionary tale for other countries that are eagerly accepting Chinese finance to build major infrastructure projects.

Sri Lanka granted a 99-year lease on the port to China Merchant Port Holdings in the hope of cutting its debt to China, which is one of the highest among emerging economies. China, for its part, has gained an important beachhead that could help its attempts to expand military influence in the Indian Ocean.

Construction of the $1.5bn Hambantota Port began in 2008 under former Sri Lankan president Mahinda Rajapaksa. The first phase of the project, which ended in 2010, cost $361m. While details of the second phase are not known, Exim Bank of China financed 85% of the first phase; in other words, the port construction was greatly reliant on funding from the Chinese government.

Mounting debt

But as the port’s losses began to mount, the Sri Lankan government found itself unable to repay its debts. While the country had an external debt of $48.3bn at the end of 2017, its annual external financing needs are $11bn – roughly the same as its annual tax revenue. Sri Lanka's debt to China totals $8bn and is said to carry a 6% interest rate.

“We had to take a decision to get out of this debt trap,” says Mahinda Samarasinghe, Sri Lanka’s port and shipping minister, regarding the 99-year lease.

As a result, Sri Lanka, an island country with a population of 20 million, is being held up as a textbook example of a country caught in a so-called debt trap set by China. Government critics say Sri Lanka’s sovereignty has been compromised by the port episode, which came two months before the former president of the neighbouring Maldives warned that its debts could force it to cede territory to China as early as next year.

Sri Lanka overview

Gaining a strategic location

Sri Lanka is located at a strategic point for China’s Belt and Road Initiative (BRI). The port of Hambantota is indispensable to China’s energy security as it imports two-thirds of oil through shipping lanes south of the port.

In 2009, Mr Rajapaksa put an end to Sri Lanka’s civil war with the Liberation Tigers of Tamil Eelam and made a policy shift toward infrastructure improvements ahead of the presidential election in 2010. This included the development of Hambantota Port, which is located within his constituency.

China is also funding a Sri Lankan airport project. Mr Rajapaksa kicked off the construction of the country’s second international airport in Mattala, an inland town 20 kilometres from Hambantota, in 2009. Of the $209m construction cost, Exim Bank of China put up $190m with a concessionary loan. Mattala Rajapaksa International Airport is now often referred to as “the world’s emptiest international airport” because only four regular flights arrive and depart each week. The Sri Lankan government plans to sell the airport, too.

India’s concern

Across the border, this has led to worries in India that the airport could become a Chinese air force base, and an Indian delegation visited the airport in 2017 to discuss taking it over. However, according to an airport official: “I heard that it was not going well due to [a] mismatch in conditions from both sides.”

China is also involved in a $15bn project to build Colombo Port City on reclaimed land in the Sri Lankan capital. The $1.4bn first phase is being undertaken by a subsidiary of China Communications & Construction Co, which is shouldering the total cost of reclaiming 269 hectares of land.

Sri Lanka’s debt equals 81.6% of its gross domestic product (GDP), which the International Monetary Fund describes as “high compared with peers, with the ratio of gross financial needs to GDP being the third largest among emerging economies”. But to the Sri Lankan government, “there is no country or institution with ready cash other than China”, says a senior economic official. 

Even after the debt problems at Hambantota became clear, in 2017 China proposed two joint $3bn and $125m projects to Sri Lanka for the construction of an oil refinery and a cement factory, respectively, around the port. This raises questions as to whether this will exacerbate Sri Lanka’s debt profile.


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