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Five Myths and Related Facts About China’s Much Talked About Loans to Sri Lanka.

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By
Daniel Alphonsus

MYTH 1: Chinese lending is commercial.

FACT:Since 2012 most Chinese lending is concessionary.

In the last five years Sri Lanka’s loans from China EXIM Bank, amounting to 3.1 billion dollars, were all concessionary – fixed at 2%.Sri Lanka also borrowed 400 million dollars from China Development Bank in 2014 at near commercial rates (roughly between 3-5% ).

For context, Sri Lanka’s borrowings from international markets are more expensive, generally over 5%. On the other hand,China’s concessionary finance is still a fair bit dearer than World Bank, ADB or JICA loans. For example, interest payments on the one billion dollar Hambantota port cost about 25 million dollars per year while interest for the JICA funded 1.7 billion dollar LRT is expected to cost 17 million per year. This difference is not minor. Over the years small annual payments can add up. So far, Sri Lanka has paid 31 million dollars in interest alone for the 200 million dollar Mattala airport.

Note, also, that prior to 2013 many of China’s loans were at commercial rates – above 6 % – including the Katunayake Expressway and Hambantota Bunkering Facility.

MYTH 2: Only China builds white elephants

FACT: India also builds them. Instead of blaming others, we need to blame ourselves.

Sri Lanka’s China funded white elephants – the Hambantota port, Mattala airport and Lotus Tower – cost nearly 1.4 billion dollars, amounting to 17% of Chinese loans. Fortunately, it appears that these losses are now being contained through leases.

But India funded white elephants too. Only one train runs between Medawachchiya and Mannar. The railway line, built with Indian concessionary finance,cost 164 million dollars. The variable interest rate loan is currently priced at 3% per year. Locals report that fewer than 200 people use it a day. This is no surprise. Mannar town is a backwater of 72,000 souls. The line only makes sense as a link to India, which is why it was built in the first place. As argued elsewhere, this railway would be a perfect complement to a ferry or the long, long overdue Indo-Lanka bridge.

Ultimately, lenders –motivated by altruism, profit or influence – will lend. The responsibility to borrow prudently and invest wisely is our own. Even Japan, the most benevolent of our bilateral lenders, keeps trying to lock us into Japanese suppliers. Examples include the ISDB television standard and monorail. Whether Sri Lanka likes it or not, any white elephants are ultimately the country’s own responsibility. That is what it means to be sovereign.

MYTH 3: China’s loans only focus on Hambantota

FACT: Now they flow to Polonaruwa too.

Nearly a third of China’s lending to Sri Lanka was spent in Hambantota. Of China’s 8.2 billion dollar lending to Sri Lanka 2.6 billion went into the Hambantota area. However, now it is Polonnaruwa’s time to eat. In the External Resources Department’s borrowing plan for 2018, nearly half of China’s loans are allocated to agriculture and irrigation in Polonnaruwa. We need to focus on building infrastructure for export-oriented, knowledge-based growth – industrial parks, a second runway at Katunayake and electrifying our railways and not on borrowing that confines our people to low-productivity and precarious subsistence agriculture.

MYTH 4: China’s loans come with no strings attached.

FACT: China can play at puppeteer too.

China’s claim to fame in much of the backward world was its policy of non-interference in domestic politics and policy. We now know that this is humbug. Although it is unclear whether payments by Chinese SOEs into Rajapaksa foundations and campaign funds were for commercial or strategic influence, what is clear is that Chinese money was used to influence domestic politics and the integrity of our elections.

The clumsiness of Xi Jinping’s reported ‘gift’ of 295 million dollars for a project of the Head of State’s personal choice is another case in point. In a democracy, especially one with a Cabinet form of government, placing funds at the President’s personal disposal is odd enough. But this is to be expected.

All great powers use money to gain influence or have done it in the past. As Ian Paisley’s suspension shows, the Sri Lankan Government is no exception.

Moaning and groaning may be helpful. But we cannot depend on the goodwill of others. The only sustainable protection for our democracy is transparency, sound laws and vigorous enforcement.

A start is thorough investigation and action both by the police and Parliament’s Ethics and Privileges Committee. In addition, the immediate amendment of the Asset Declaration Act (to make the declarations public), complemented by a register of interests is a must.

MYTH 5: Sri Lanka is trapped by Chinese debt

FACT: Sri Lanka owes more to US investors than to China.

Loans from Chinese banks only account for 10 % of Sri Lanka’s overseas debt. But official statistics show that 39 % of Sri Lanka’s overseas debt is borrowed from international markets – largely US based institutional investors. That said, Chinese loans account for a very large proportion of debt maturing in the next few years – perhaps explaining some of the concern.

Our debt problems are not really about excessive borrowing. They are about borrowing and not investing wisely. It makes sense to borrow as long as the return we get is greater than the cost. Spending borrowed money on corruption and white elephants is one important reason why we have debtor woes.

Our fate is in our own hands

In conclusion, the fundamental problem with Chinese loans is not financing costs or debt traps. As extensively discussed by others, it is the lack of transparency, corruption, absence of competitive bidding and politically motivated project selection. True, if China were exceptionally benevolent all this would not occur.

But we need to remember that China is as plagued by these problems within China as we are. It is a tall order to expect Chinese companies to play by one set of rules at home and another abroad – unless we compel them to do so. So we need to stop pointing fingers and realise that our fate and the enforcement of our law is, above all, in our own hands.


(Loan data, available at the author’s twitter @danielalphonsus, is from the External Resources Department. Other statistics are from Ministry of Transport Performance Report 2014 and the External Resources Department Performance Report 2017.

The writer wishes to acknowledge the External Resources Department’s exemplary service. They fulfilled his RTI request in its entirety within four days of emailing)

Courtesy:Sunday Observer

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