The Chinese investments and loans in Sri Lanka have turned this island nation into a modern-day semi-colony, placing the future of its economy under the control of Chinese state-owned contractors, banks, and the International Monetary Fund (IMF).
The close relationship between Sri Lanka and China began in 2007 when Beijing provided military and diplomatic assistance to Sri Lankan President Mahinda Rajapaksa to combat the Tamil Tigers. Over time, with China’s high-profile investments in Sri Lanka’s infrastructure projects, including the Hambantota Port development project, the Colombo Port City Complex, and the Mattala Rajapaksa International Airport (MRIA), the two countries’ ties have become even closer.
In theory, building infrastructure is what countries like Sri Lanka need to develop a market economy, stimulate economic growth, and become a regional trade hub.
However, in reality, Chinese infrastructure investments in this island nation have not lived up to expectations.
The construction of these projects initially boosted economic growth through a “multiplier effect.” Sri Lanka’s GDP growth rate skyrocketed from low single digits in 2009 to 16.12% in 2012, but over the following decade, it has mostly been on a downward trend.
There is a reasonable explanation for this pattern. The advancement of these three major infrastructure projects was driven by political rather than economic considerations, aimed at serving China’s expanding influence in the Indian Ocean and its containment strategy against India, rather than local economic interests.
As a result, China’s investments failed to generate the intended acceleration effect on economic growth through building sustainable infrastructure projects.
Some projects were economically unviable as they lacked a sufficient market size, making it unreasonable to allocate resources to them, such as the MRIA airport. Consequently, these projects ended up squandering the country’s precious resources.
While other projects might be economically feasible, they were constructed by Chinese state-owned construction companies at inflated costs rather than being awarded through transparent, competitive bidding to private contractors.
Furthermore, Chinese investments have turned into a debt trap, as these investments were provided by Chinese state-owned banks at high interest rates and in an opaque manner, leading Sri Lanka into massive debt to the Chinese government.
By 2023, the Sri Lankan government’s debt had reached 103% of its GDP, with a growing proportion owed to China. Additionally, the country’s budget deficit stood at 10.51% of its GDP, further worsening the debt situation.
Sri Lanka continues to experience fiscal and current account deficits, demonstrating its inability to meet its financial commitments, with debt levels only rising.
To address the mounting debt owed to China, Sri Lanka signed agreements to convert loans into equity, making China the owner of key infrastructure projects such as major ports, turning these locations into crucial footholds for Beijing in the Indian Ocean.
Meg Rithmire and Yihao Li, in a research report from Harvard Business School, state, “In 2016, a Chinese state-owned enterprise acquired assets in the Hambantota Port, arousing concerns about Sri Lanka’s sovereignty and raising worries in Delhi and Washington about China’s naval ambitions. This case explores the dynamic process of China’s ambitious Belt and Road Initiative launched under its strongman leader Xi Jinping and examines the political and economic dimensions of sovereign borrowing during China’s era of easy money.”
However, these agreements were not enough to spare the country from seeking debt relief from the International Monetary Fund (IMF).
In March 2023, the IMF, known for its stringent loan terms and conditions, approved a $2.9 billion loan to help alleviate Sri Lanka’s balance of payments crisis. This crisis had made it challenging to import essential goods like food, fuel, and medicines, leading to social unrest.
Nevertheless, this loan came with conditions, including stipulations on the future direction of the country’s economic policies.
The IMF, in outlining the terms and conditions of the loan, stated, “Maintaining macroeconomic stability and restoring debt sustainability are key to ensuring Sri Lanka’s prosperity, requiring steadfast implementation of responsible fiscal policies. Efforts must continue to increase revenues and restrict expenditures to prepare the 2025 budget based on project parameters.”
While Chinese investments were expected to aid Sri Lanka’s growth and development, they have actually plunged the country’s economy into a perfect storm, leaving it in a situation no nation would want to be in: reliant on the IMF and China to sustain its existence.