China and the World

Any port in a storm

Colombo softens stance on Chinese investment, as debt burden grows

A worker looks on at the Colombo Port City construction site, which is backed by Chinese investment, in Sri Lanka

Colombo’s new port project will recommence construction in May

The festivities around New Year are the most important of the calendar for Sri Lankans. They are observed in April, when custom dictates that a 12-hour period before the Sun enters Aries (Mesha Rashiya) is respected by doing absolutely nothing (Nonagathe). Buddhists and Hindus both regard it as an inauspicious period and believe that anything undertaken during this time will be fruitless.

Financial officials from the Sri Lankan government couldn’t keep to the custom this year, however, as they spent the entire holiday period in Washington finalising a $1.5 billion Extended Fund Facility from the IMF.

On April 14, during the Nongathe period, the finance minister Ravi Karunanayake even hosted a press conference explaining why Sri Lanka needed the IMF money.

“We took over an economy which had been destroyed due to corrupt practices and financial indiscipline,” he told the assembled journalists.

Government officials like Karunanayake have also repeatedly complained about Colombo’s previous ties with Beijing, alleging that the former regime, under strongman Mahinda Rajapakse, took on too much debt on uncompetitive terms, most of it from China.

Today many of these Chinese-funded projects are not generating the revenues to repay the debt that financed them. In particular, a $1.4 billion port and $220 million airport in the former president’s hometown of Hambantota are sitting idle.

At $5,500 per head, Sri Lanka enjoys double Vietnam’s per capita GDP. But the country is burdened with a government-debt-to-GDP ratio that’s also almost twice Vietnam’s, according to data from rating agency Standard & Poor’s (70.3% versus 46%). Moreover, 90% of Vietnam’s debt comprises concessionary loans. Less than half of Sri Lanka’s does.

Sri Lanka now spends more than a third of government revenues servicing its financial obligations, although its ability to do so is limited by the fact that it isn’t very good at taxing its people (something the government cannot blame the Chinese for).

Government revenues as a percentage of GDP are 13.6% according to S&P data, compared to Vietnam’s 24%.

Now – in addition to seeking IMF help – Sri Lanka is rebuilding ties with the Chinese. After the coalition government came to power in January last year, it soured relations by putting a number of Chinese construction projects on hold, citing concerns about uncompetitive terms, potential environmental damage and corruption.

The largest dispute has involved the new port city in Colombo (now costing $1.5 billion as a consequence of the rupee’s depreciation). China Communication Construction, the state-owned firm working on the huge project, has been pursuing the Sri Lankan government for a $125 million penalty payment for the initial suspension.

But during a state visit to China earlier this month, Prime Minister Ranil Wickremesinghe said work will recommence in May – a decision that seems to have been prompted by Sri Lanka’s need for funding to deal with a balance of payments crisis.

Earlier this year a government official admitted that the Sri Lankan leadership was having a rethink on its diplomatic approach. “The stance on China has completely changed,” cabinet spokesman Rajitha Senaratne told Reuters. “Who else is going to bring us money, given tight conditions in the West?”

At the end of Wickremesinghe’s visit, which Li Keqiang hosted, the Sri Lankans stressed their continuing enthusiasm for China’s maritime Silk Road project and gratefully accepted a Rmb500 million ($77 million) token of friendship.

The two countries declared that relations “had stood the test of time” and that they were working towards an “all-weather friendship” (a term that China and Pakistan use to describe their own ties).

Predictably, the rapprochement hasn’t gone down as well in India, which has concerns about Chinese encirclement as a result of the various ‘One Belt, One Road’ projects in Sri Lanka and Pakistan. Wickremesinghe has tried to reassure the Indians that projects like the Colombo port are “an opportunity for everyone to make money” rather than a strategic threat.

But an editorial in the Times of India was more suspicious, claiming that the Chinese state-owned Global Times had “let the cat out of the bag” about the real motives for China’s ‘String of Pearls’ portbuilding strategy by moaning that construction projects in Pakistan wouldn’t serve as a strong foothold for China in the region because of “the calamitous state of Pakistan’s security”.

Perhaps more surprisingly, some of the Chinese media has expressed reservations about renegotiating financial terms with the Sri Lankans. The Global Times also flagged concerns about a proposal from Colombo to swap parts of its $8 billion in debt to Beijing for equity in some of the infrastructure projects, for instance, quoting a warning from Bai Ming from the Chinese Academy of International Trade and Economic Cooperation that “predictable profits and stable investment returns” cannot be expected.

Apple Daily, a Hong Kong newspaper, said that Wickremesinghe even “scowled” when Chinese journalists asked whether Sri Lanka is having problems paying its debts because of poor economic management.

In the meantime the Sri Lankans have to navigate a difficult road, buffeted between the competing ambitions of China and India. Nearly every government press release on the topic emphasises Colombo’s commitment to a non-partisan foreign policy, as well as its democratic accountability for the trade and investment projects that it pursues with its larger partners. One of the media briefings heralding Wickremesinghe’s trip to China highlighted that it was the first visit since the “good governance government of President Maithripala Sirisena was formed”. Colombo also says it will sign new agreements with other countries aside from the Chinese and that it promises to submit them to parliament for ratification and make them available for the press to scrutinise.

Nonetheless, the country’s Sunday Leader newspaper has highlighted the treacherous path that smaller countries must tread with the big powers. “Do not stand too near the rich man lest he grabs thee, or too far away lest he forgets thee,” it concludes.

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