Long queues have become a common sight in cash and commodity starved Sri Lanka over the past few weeks. Essentials like oil, gas, food, and even paper for writing exams is in short supply.
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India's southern neighbour is deep in domestic and international debt. The latest victim of the China model of 'debt-trap diplomacy'.
A crisis in the making, the island nation’s economic distress is a result of two decades of high-interest loans from China. Sri Lanka drew billions in investment under China’s Belt and Road Initiative (BRI), a program launched in 2013 to build ports, roads, railways, pipelines and other infrastructure.
But none of these investments could generate expected revenues to pay back the loans. The numbers now look grim.
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China accounts for about 10% of Sri Lanka’s $35bn foreign debt to April 2021, government data shows. Unable to repay a $1.4bn loan for a port construction in southern Sri Lanka, Colombo was forced to lease the Hambantota port to a Chinese company for 99 years in 2017. According to the nation's central bank data, Sri Lanka currently has about $2 billion in foreign exchange reserves, against $7 billion in total debt due in 2022.
India is being a good neighbour, and trying to help stabilise the nation, but prospects are slim.
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India has extended an additional credit line of $1.5 billion to Sri Lanka, on top of the $1 billion given earlier to help pay for food and medicines. India also extended a $400-million currency swap, a $500 million loan deferment and a $500-million credit line for Lanka to buy fuel. India sent Lanka around four consignments of 40,000 metric tonnes of diesel to help reduce power cuts, and 40,000 tonnes of rice in prompt shipments.
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But China, which has deeper pockets, has not yet agreed to a Sri Lankan request for a $2.5 billion credit line or a restructuring of its overall debt. Increasingly, an IMF bailout is looking like the only option on the table for Sri Lanka. This is particularly bad, since Sri Lanka has sought IMF bailouts 16 times in the past 56 years, second only to debt-ridden Pakistan.
Pakistan, meanwhile seems to be self-sabotaging its economic recovery. Prime Minister Imran Khan bowled a googly, by calling for snap elections, effectively pushing the country into political uncertainty. China has held Pakistan hostage through the China-Pakistan Economic corridor (CPEC). Beijing is also Islamabad’s largest creditor, with Pakistan owing 27.4% (or $24.7 billion) of its total external debt to China.
The story is similar in Maldives too. 78% of Maldives' external debt, about $1.4 billion is owed to China. Like other emerging south Asian economies, Bangladesh, keen on expanding its infrastructure leaned into the Chinese Belt and Road Initiative too. China is currently the biggest trading partner of Bangladesh and the country is set to receive Chinese investments of over $40 billion under a bilateral partnership. Reports say, from 2009 to 2019, China invested an estimated $9.75 billion in transportation projects in Bangladesh.
Experts have called out China for using "debt traps" to gain leverage over other nations. This can be crippling for a nation’s economy, because if a country fails to pay its loans, it becomes vulnerable to pressure from China to support its geo-strategic and security interests.
As per latest estimates, Chinese debt in South Asia has gone up from $4.7 billion to upwards of $40 billion, over the past few years. China is also one of the world's largest single creditor nations. Its loans to lower and middle-income countries have tripled over the past decade, reaching $170bn by the end of 2020.
The pattern is quite clear in south east Asia. India has stepped in to help many of its neighbours, to alleviate the stress that this debt trap creates. India's focus is on cooperation through development, one that promotes self-reliance.
Prime Minister Narendra Modi said, "India is making development partnerships that are marked by respect, diversity, care for the future, and sustainable development. For India, the most fundamental principle in development cooperation is respecting our partners. That is why our development cooperation does not come with any conditions. It is not influenced by political or commercial considerations."