Belt and Road Initiative: Debt trap? The Sri Lankan port case study

The Belt and Road Initiative comprises 138 countries, relying on a network of infrastructures that connect Europe, Africa, and Asia. However, the initiative has caused unsustainable debt and environmental damage. The Center for Global Development raised concerns about the countries that receive funding from the initiative, such as Pakistan and Laos, where rising debt puts economies at risk of possible widespread default. The increasing debt and China’s role in the management of bilateral problems arising from it have already exacerbated domestic and bilateral tensions in some BRI countries, such as Sri Lanka. With that in mind, the case of port of Hambantota in Sri Lanka will be analyzed, where the unsustainability of debt has led to agreements that raise alleged suspicions of ‘’financial traps’’, or debt trap diplomacy, as well as questions regarding sustainable funding in the Belt and Road countries and about China’s position regarding debt sustainability.

The interest in Hambantota lies in its strategic location, because it is along one of the busiest commercial routes in the world, connecting Asia and Europe. In 2017, in the face of Sri Lanka’s inability to pay, China Merchants Ports agreed to pay the Sri Lankan Port Authority 1.1 billion US dollars for a 99-year, 70% stake in the port. Hambantota was unable to compete in the region, never reaching more that 34 vessels/year. Consequently, debt to China has become untenable and, after attempts to renegotiate it, Sri Lanka ceded the port and five thousand hectares around it. The agreement between both countries was seen as a ‘win-win’, since the port had suffered losses since the beginning, however, Sri Lanka contracted five loans and the agreements relating to these have not been changed. The loans were made from 2007 to 2012 and some of them were obtained at interest rates of up to 6%, with a total of 1.263 billion US dollars contracted. Only two had commercial fees, meaning that, most were under concession. However, the loan payback period was not long, resulting in larger installments after the end of the grace period. Since the loans did not mature, the port lease cannot be interpreted as a debt swap, which refers to a debt cancellation in exchange for assets or an asset. A Public Private Partnership has been carried out, which means that the remaining 30% of the participation belongs to the Sri Lankan Port Authority and the commercial operations of the port are managed by CM Port and the former, at the same time.

However, there is still a concern regarding the cost of the external debt servicing, which is inherent in the maturity of sovereign bonds, representing more than 40% of total debt servicing in 2019. It can be said that it is wrong to say that China acquired the port of Hambantota because Sri Lanka did not pay the debt obtained to build the port, since the ‘’port agreement’’ was a lease agreement separate from the loan. Beijing sees this agreement as an ad hoc solution for the unsustainability of the debt of countries like Sri Lanka. Authors such as Barry Sautman and Yan Hairong (2019) advocate the idea that it would be controversial for China to use a financial dependency mechanism, as it would diminish the capacity of these countries to be its borrowers, defending the idea that debt trap diplomacy is a political instrument that reflects an ideology promoted by the USA against the Belt and Road, which is seen as a threat to its interests in the countries involved.

Therefore, what is China’s intention when investing in projects with no evident return? The country has been implementing different initiatives via the Space Silk Road, the Polar Silk Road and the ‘String of Pearls’. Nicholas Assef (2018) questions whether funding of these projects  is attributable to debt trap diplomacy or whether it should be understood from a geopolitical perspective, since one of China’s intentions is to ensure access to the Indian Ocean and to acquire infrastructures that form a solid transport and connection network. The strategic use of the debt can put into practice what Assef (2018) called dormant asset. Sri Lanka, hindered by 26 years of civil war and pressured by the EU, after refusing aid from India and other countries, the country opted for Chinese capital to build the infrastructure it does not possess. The author reiterates that while relying on any foreign capital, it is necessary to consider the potential impact on ‘’sovereign rights in the event that interest rates become overwhelming’’.

In conclusion, although it seems to be exacerbated to name the project under the wing of the BRI as debt trap, Beijing’s influence in Hambantota may be a concern. It is possible that Sri Lanka manages acceptable financial returns, but China may be creating a portfolio of dormant assets, laden with debt, in strategic geographic locations that help it maintain supply-line security across international maritime trade routes. The increase of China’s projection in the Indian Ocean is a relevant factor for the economy and global geopolitics, with the potential to affect the balance of powers in Asia in the following decades. There is also an increasing concern with the possible utilization of the ports for military reasons by China, in the event of it becoming involved in conflicts. Therefore, it cannot be denied that the Belt and Road initiative not only has an economic development character but demonstrates a clear Chinese geopolitical aim: to obtain regional influence and economic power. Besides that, its interest may also include the desire to obtain strategic bases and locations throughout the world. The project demonstrates China’s willingness to reach out to other players, also involving European countries such as Portugal and Italy.

References:

  • WIJERATNE, David; RATHBONE, Mark,; WONG Gabriel (2018); A Strategist’s Guide to China’s Belt and Road Initiative. Strategy + Bussiness. Available at:  https://www.strategy-business.com/feature/A-Strategists-Guide-to-Chinas-Belt-and-Road-Initiative?gko=8e9c5

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