Report dissects role of Chinese debt in Sri Lanka’s economic crisis

Did Chinese loans plunge Sri Lanka into economic and political crisis in the spring? Their rapid increase, from 1% to 19.6% of Sri Lanka’s total external public debt between 2000 and 2021, fueled suspicions of a “trap” set by China to expand its influence there. It has disbursed between 500 billion and 1,000 billion dollars (between 480 billion and 960 billion euros) to dozens of countries located along the “new silk roads” in barely two decades.

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The two Sri Lankan economists Umesh Moramudali and Thilina Panduwawala wanted “separating myth from reality” of this aid to their country, combing through numerous contracts and official documents signed by Colombo. Their report published on Thursday 1^er December, by the China Africa Research Initiative research center of the American Johns-Hopkins University, demolishes many received ideas.

“We found no deliberate ‘hidden debt’ in China’s loans to Sri Lanka’s public sector,” say the two authors, in response to all those who denounce its opacity. If the figures are concealed, it is often due to the borrowing country, which, for example, artificially reduces its indebtedness by transferring its loans to the balance sheets of public enterprises.

Lack of transparency

In total, economists estimate that the share of Sri Lankan external debt held by Beijing is 19.6%, well beyond what China has always wanted to admit (between 10% and 15%). which, in the midst of the economic slump in the spring, sought to minimize its role. Not only is it the first creditor country of Sri Lanka, but its interest rates are much higher (3.2% on average, against 1.6% maximum for those of Japan or the World Bank).

However, Chinese loans are not transparent, due to the numerous confidentiality clauses included in them. Others are problematic. The report’s authors found that in the event of default, Colombo had agreed not to “seek to obtain comparable conditions” restructuring to those granted by other creditors. A breach of the principle of equal treatment dear to the Paris Club (a group formed by creditor countries) and which risks complicating the negotiations in progress, under the aegis of the International Monetary Fund (IMF).

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This rise of China in the financing of the development of Sri Lanka fills a vacuum left by the development banks. “After being upgraded to lower-middle-income country status in 1997, Sri Lanka has gradually lost access to most concessional finance,” point out the two economists.

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