Perils of Chinese Investment in Sri Lanka

As Sri Lanka negotiates with bilateral creditors on debt restructuring to avail of the IMF package, the promise and perils of a geopolitically significant developing nation navigating the growing strategic rivalry in the Indo-Pacific region has become apparent. Earlier in August 2022, the docking of the Chinese satellite tracking vessel Yuan Wang 5 in Hambantota port, amidst objections raised by both India and the U.S., had underlined the tricky balancing act that Sri Lanka will have to undertake in managing ties with larger powers.
China’s attempts to scale its influence in a region traditionally considered India’s backyard has muddied the waters. One noticeable manifestation of increasing Chinese
encroachment can be seen in the domain of foreign investment. China’s external lending and even private corporation’s activities abroad are dictated by political considerations. Its foreign investment has become a tool of buying geopolitical influence with detrimental impact on the targeted country’s fragile democratic machinery as well as the local environment where the Chinese-funded projects are implemented.
With its developing economy graduating to the middle-income country status that deprives it of concessional loans from multilateral bodies, Sri Lanka’s financing and infrastructural requirements are crystal clear. Buoyed by decades of economic growth with surplus capital at hand, China’s inroads into South Asia are facilitated by the developmental aspirations of Sri Lanka. While indeed the Rajapaksa clan shares closer ties with China owing to the latter’s defence of Sri Lanka in international forums for human rights violations, Chinese projects continued to flourish even under the Maithripala Sirisena presidency.
The shifting pattern in Sri Lanka’s external borrowings has seen China emerging as the
largest bilateral creditor. Contrary to the popular perception which places its share at 10 to 15%, Chinese lending accounts for around 20% of Sri Lanka’s public external debt. A briefing paper by Sri Lankan economists highlights that for the period 2008-2021, the effective interest rate on Chinese loans was costlier than the average rates on loans from Japan or multilateral bodies.
Concerns over the handing over of the Hambantota port in 2017 have been at the core of Sri Lanka’s debt trap narrative. The port has turned out to be a white elephant project raking in low revenues which couldn’t cover the repayments. However, when it was launched, it was touted as a big-ticket Chinese investment in the island nation, which would pave way for Colombo’s prosperity. The Rajapaksa government even undertook
the project disregarding the feasibility study’s recommendations.
In addition, other problems persist in the way Chinese investments have come to shape the local economy. The closeness of the Rajapaksa clan to the Chinese Communist Party obviously raises the concern of the elite capture, which is detrimental to the larger national interest of Sri Lanka. The possibility of corruption in the non-competitive awarding of
bids to Chinese contractors has also been raised. By showing the willingness to fund economically unviable projects in the ruling politician’s constituency for electoral gains, Chinese foreign economic policy serve as a contributing factor in undermining the already shaky foundations of democracy. Further, repeated invocations on part of opposition parties of Chinese affront to Sri Lanka’s sovereignty serves to underscore the threat perception that Chinese economic investment invokes.
Moreover, the initial set of Chinese-funded projects has been criticised for neglecting environmental concerns. In Sri Lanka’s southern province, agricultural lands and jungles had to make way for Chinese-funded highway and link road projects. A stretch of the Colombo – Galle – Hambantota – Wellawaya Road or the A2 Highway cuts through the elephant corridor and the Department of Wildlife Conservation estimates that the project area is home to 15-20% of the island nation’s elephant population. The Southern highway has also drawn the ire of locals for making the area more prone to landslides and flooding. Likewise, the port area projects have stoked the fear of coastal erosion and harm to fish population.
Further, opposition party members have pointed to the potential danger of the erosion of
sovereign autonomy due to the overreliance on Chinese financing. However, the Chinese have sought to pin the blame on domestic politics accusing the Sri Lankan government of being opportunist. The Chinese public discourse on Sri Lanka’s crisis situation hardly gives the impression of a friendly rising power coming to the rescue of a beleaguered partner. Moreover, it even refused to help Sri Lanka during the recent bout of economic crisis. For instance, in case of the ongoing debt restructuring talks, analysts have argued that Chinese concessions to a crisis riven Sri Lanka is certainly less generous than the terms India has offered in line with the Paris Club recommendations.
While the developing countries’ need for external financing for development projects is self-evident, it has become increasingly clear that China is not the answer that was touted by both the Chinese Communist Party and local politicians. China’s ability to extend loans have come under strain in no less measure due to the COVID-induced lockdown in China. Also, its lack of prior experience with lending and the political imperatives behind such decisions have led to wasteful expenditure. In South Asia itself, much of the BRI lending have turned into white elephant projects in Pakistan and Sri Lanka. China’s selfish domestic discourse and unsatisfactory debt restructuring in moments of crisis are indications of China’s ineptness at being a responsible actor. The lessons for developing nations on the perils of Chinese investment should be apparent.

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