China employed its devious ‘Debt-Trap Diplomacy’ to gain a strategic edge over Sri Lanka, an independent foreign policy think-tank, Red Lantern Analytica, said. It added that Sri Lanka has fallen apart as a country because of the economic disaster caused by the poor governance, lack of transparency, the Chinese debt trap, and corruption.
Sri Lanka’s GDP-to-Debt ratio has been continuously increasing since 2010, when the island nation’s financial downward spiral began. An increase in the current account deficit and a steep decline in exports precipitated a full-blown economic crisis in 2019.
The think-tank also said that China’s economic help to Sri Lanka was mostly a plan to get political and security leverage against India, and move forward with its expansionist goals along the Indian Ocean Rim. There has recently been a spate of articles and studies across the US and Europe that seek to debunk the ‘debttrap diplomacy’ of China under its multibillion dollar connectivity project, the Belt and Road Initiative (BRI).
This type of diplomacy refers to offering projects/loans on terms that end up being too difficult for countries to repay, eventually compelling them to accept political or economic concessions. China’s BRI has resulted in several such unsustainable debt-for-infrastructure deals, which nevertheless, further Beijing’s geostrategic interests by increasing its global presence and influence. It is clear that China has approached its investments strategically. While engaging in projects, it has factored in the host countries’ abilities to repay loans. It also has wider strategic objectives of making the Middle Kingdom a global power and BRI is one of the tools to achieve this objective.
In South Asia, with the Indian Ocean and Indo-Pacific as new theatres of contestation, Beijing will, and has capitalised on opportunities to further entrench its presence, influence, and leverage in the region. Sri Lanka is a prime example of China having taken advantage of internal fiscal mismanagement and debt.
A New York Times investigation into the 99-year Hambantota Port deal and 15,000 acres of surrounding land that was given to a state-owned Chinese company revealed an insistence on the Chinese side to focus on handing over equity in the port, rather than allowing any easing of negotiating terms with the Sri Lankans.
Additionally, while China explains the deal as a purely commercial endeavour, Sri Lankan officials have stated the intelligence and strategic opportunities the port offers were part of the negotiations – aspects that have serious security implications for India.
China’s engagement with the Maldives could result in a similar situation where $1.4 billion amounting to 78 per cent of the country’s external debt is owed to China.
The Maldives is also one of eight countries at particular risk due to continued Chinese lending and can suffer from debt distress, as stated in a report by the Centre for Global Development (CGD).
China has also included dubious clauses in bilateral agreements that directly contradict the benign nature of the BRI and reinforce the proactive debt-trap diplomacy in other parts of the world.
Montenegro is one such case where China has loaned €800 million to build a highway. A provision under the agreement states if Montenegro were to default on repayment, China would get the right to access Montenegrin land as collateral – directly alluding to a strategy of seizing assets in case of inability to repay.
This will provide China a direct entry into Europe. . Presently, Montenegrin debt is around 65.9 pc of its GDP with China holding 25 pcc of its public debt.
This will provide China a direct entry into Europe. To further complicate matters, the contract also stipulates that any legal dispute would be placed under an arbitration court in China.
China’s debt-trap diplomacy is not a figment of imagination. Looking ahead, as repayment of loans mature, we could see Beijing becoming increasingly opportunistic and seizing assets in what it perceives as strategic parts of the world.