Since the early 2000s, China's debt profile in Sri Lanka has increased rapidly, with estimates indicating that over 20% of the overall debt stock is owed to China. Beijing's lending has been opaque on high-interest loans and has often contributed to several white elephant projects. Much of this lending comes from Chinese policy banks, such as China Exim Bank and China Development Bank that is entrusted to further Beijing's economic and commercial interests. As a result, China has often backtracked on restructuring its debts.
On 11th October, the Government of Sri Lanka confirmed that it had completed its debt restructuring negotiations worth $4.2 billion with China’s Export-Import (EXIM) Bank. The development has reignited hopes of unlocking the second tranche of the IMF bailout package that is on hold due to dissatisfaction over the country’s progress in external debt restructuring and revenue generation. While details of the terms of the agreement with China aren’t public yet, the debt restructuring indicates that Beijing can no longer take small South Asian countries like Sri Lanka for granted. Since the early 2000s, China’s debt profile in Sri Lanka has increased rapidly, with estimates indicating that over 20% of the overall debt stock is owed to China. Beijing’s lending has been opaque on high-interest loans and has often contributed to several white-elephant projects. Much of this lending comes from Chinese policy banks, such as the EXIM Bank and China Development Bank - entrusted to further Beijing’s economic and commercial interests. As a result, China has often backtracked on restructuring its debts. Previously, in 2014 and 2017, when Sri Lanka requested restructuring, China responded by providing fresh loans. Even during the recent crisis, Sri Lanka’s requests for a $4 billion assistance were ignored. It was only when other countries agreed to debt restructuring that Beijing offered a mere two-year moratorium for the country. Following it, China also refused to participate in collective debt restructuring negotiations.
China’s debt profile in Sri Lanka has increased rapidly, with estimates indicating that over 20% of the overall debt stock is owed to China.
Besides, China has continued to use Sri Lanka to further its interests. Despite passivity, it resumed its projects following the disbursement of the IMF package in March 2023. China’s Sinopec became the second country to enter Sri Lanka’s domestic fuel market. Sinopec is also shortlisted to build an oil refinery in the Hambantota port, and China is also investing nearly $400 million in building a logistics complex at the Colombo Port. Besides, China has also consistently pressured Sri Lanka to dock the former’s vessels. The docking of Yuan Wang-5 in 2022, the military vessel docking in August 2023, and the ongoing negotiations to dock the Shi Yan 6 further substantiate China’s use of Sri Lanka for its own interests. In contrast to China’s lackluster approach, India - the traditional player in the region, has embraced a robust and people-centric approach in Sri Lanka. Within one year - India offered nearly 4 billion USD in the form of currency swaps, loan deferrals, credit lines, and investments. It is the first country to assure debt restructuring to the island nation and co-chairs the creditors’ platform to negotiate a common debt treatment plan for Colombo. India’s assistance also intends to promote a self-reliant Sri Lanka. India has thus pushed for transport and energy connectivity, port infrastructure development, and the Economic and Technology Cooperation Agreement (ETCA). Recently, India committed additional funds for expediting socio-economic development projects in Sri Lanka. With Sri Lanka’s increasing geopolitical significance, others like Japan, the US, and Australia are interested in assisting the island nation. Japan - the second largest creditor to Colombo, has shown flexibility and adaptability in its debt restructuring. Alongside India, it co-chairs the creditors platform and has worked on debt restructuring with the IMF and the rest of the Paris Club. Tokyo has also offered more than 100 million in humanitarian assistance and is keen to play a role in the country’s long-term economic development. In fact, Japan will soon be installing a Free Trade Zone in Sri Lanka, and negotiations are in place for the Rail project and investments in the energy sector, roads, ports, and green and digital economy. In addition, countries like the US and Australia with no debt obligations, have offered assistance worth $270 million and $75 million each. Washington has also played a crucial role in the IMF negotiations, while Canberra has assisted Sri Lanka in the Paris Club.
Tokyo has also offered more than 100 million in humanitarian assistance and is keen to play a role in the country’s long-term economic development.
Sri Lanka has also been quick to leverage its agency. Today, Colombo has become more determined to engage with India and Japan, even as it flirts with China for new investments and debt restructuring. But, it has also pushed back Beijing on multiple occasions. Its outreach to the IMF, unilateral suspension of debt repayments, and acceptance of specific Indian projects have not gone well with China. Furthermore, Colombo, on multiple occasions has pushed Beijing to postpone its ship dockings due to Indian sensitivities. And unlike before, Sri Lanka has also been keen to avoid fresh loans and has been determined to seek debt restructuring on its favorable terms. This political contestation over Sri Lanka and the island nation’s increasing agency has likely nudged China to conclude its debt restructuring negotiations. Beijing might have been keen to cut a better bilateral deal and outdo other players in the region, who have agreed to restructure Sri Lanka’s debts regardless of China's status on debt restructuring. There may also be a belief in Beijing that restructuring loans might offer new leverage over Sri Lanka. Notwithstanding this, one thing has grown clear - China can no longer take states like Sri Lanka for granted. In a rapidly evolving world, where geopolitically critical countries have more agency amidst emerging alternatives, China will have to be a more responsible player and avoid the temptation of solely being guided by its narrow approach to bilateral engagements.
This commentary originally appeared in Economic Times.
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Professor Harsh V. Pant is Vice President – Studies and Foreign Policy at Observer Research Foundation, New Delhi. He is a Professor of International Relations ...
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Aditya Gowdara Shivamurthy is an Associate Fellow with ORFs Strategic Studies Programme. He focuses on broader strategic and security related-developments throughout the South Asian region ...
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