Sri Lanka’s Hambantota Gambit Serves As A Warning For Countries Not Yet Ensnared In China’s Debt Trap

Even before India articulated its response to the Belt and Road Initiative (BRI) in a strongly-worded statement ahead of the Beijing summit, saying connectivity projects must follow principles of financial responsibility to avoid unsustainable debts, the signs of Chinese investment bringing unserviceable debt burden were visible in Sri Lanka.

The island nation had started the construction of a port in Hambantota in 2008 with China funding 85 per cent of the project. Having failed to operate the facility profitably, something that had been predicted pending construction of the port, Sri Lanka is struggling to repay that money. It has now signed an agreement to give a Chinese firm a 70 per cent stake in the port to be able to pay that debt.

The situation at the international airport barely 30km from Hambantota, which too was built with Chinese assistance of $190 million (over 90 per cent of the total cost), is not different. Not more than five flights take off every week serving just a few hundred passengers, making it economically unviable. Sri Lanka has now decided to hand over the airport to India so that it can repay the Chinese loan.

Sri Lanka’s estimated national debt today stands at $64.9 billion, of which $8 billion is owed to China. This serves as a warning to countries, which are not yet ensnared in China’s debt trap, against dependency created by Chinese loans which often have an interest rate of 6 to 7 per cent.

The region that houses these projects – although close to sea lines of communication – is fairly isolated. To assess that these projects would be economically unviable should not have been difficult, given that there is no industrial hub nearby. China, still, chose to finance them for reasons not beyond geopolitics.

The trend, now clearly visible in Chinese investments which are a part of the BRI, is worrying for India. Many BRI projects in India’s periphery, like Pakistan’s Gwadar Port, are expected to fail economically, creating debt burdens. To resolve their crises, countries would convert debt into equity, ultimately leading to Chinese ownership of the projects, as seen in Sri Lanka’s case.

Fears that China may use the port for military purposes have been alleviated, at least for now, with Colombo being in-charge of security matters at the port. However, the same may not be true for other projects, including those being financed by China in Pakistan and Myanmar as part of the BRI initiative.