Decoded: China’s ‘debt trap diplomacy’ - Which other countries can go down the way of Sri Lanka?

Sri Lanka has been rocked by protests as it faces its worst economic crisis in decades. The country has only around $50m in foreign currency reserves, while it has racked up around $51Bn in debt.

Around $6.5Bn of Lanka’s debt is owed to China, in order to fund what critics have called unnecessary infrastructure projects.

A prime example was a billion-dollar port in Hambantota, which was built with Chinese investment despite feasibility studies indicating that the project would not be commercially viable. India, which frequently lends money to Sri Lanka, had refused funding for the same.

After the project failed, as predicted, the Lankan government handed over the port and 15,000 acres of land around it to China, for 99 years.

China's 'debt-trap diplomacy'

Many have identified this as a strategy on China’s part, termed ‘debt-trap diplomacy’. China offers loans for infrastructure projects under the Belt and Road Initiative (BRI) that end up being too difficult for the recipient country to repay. The country then has to make economic or political concessions to China, including asset-grabs in the form of equity in the projects, or even agreeing to Chinese military bases on their land.

Although China’s ‘debt trap’ is not entirely responsible for Sri Lanka’s problems, many have called it another example of China’s predatory lending patterns. China picks it targets carefully, sanctioning projects and giving loans to resource-rich or strategically-placed countries. The recipient nations often do not have a good credit rating, and few, if any, have alternative sources of external finance.

Sri Lanka is not the only country caught in this web. A report by the BBC says that more than 40 low and middle-income countries owe debt to China which is more than 10% of the size of their annual GDP. Much of this debt is ‘hidden’, and not reported in official statistics.

Djibouti, Laos, Zambia, and Kyrgyzstan have debts to China equivalent to at least 20% of their annual GDP.

'Debt-trap diplomacy' concerns India

India has been particularly concerned about debt-trap diplomacy, as it has often targeted India’s neighbours under the BRI.

Apart from Sri Lanka, Pakistan has also signed up for massive Chinese debt-funded infrastructure projects. Experts estimate that it would take Pakistan nearly 40 years to pay back its debt to China.

And there is concern in New Delhi that Bangladesh, which is courting Chinese investment for a Metro Rail Network in Chittagong, could be falling into the same trap.

Comments by External Affairs Minister S Jaishankar have made India’s stance on ‘debt-trap’ diplomacy clear. While not directly naming China, Jaishankar expressed concern for nations saddled with large debts, and said that it was very important for countries to make informed decisions.

PM Modi, meanwhile, has underlined the distinction between China and India’s method of supporting development projects. The Prime Minister cited examples of India’s support to development projects in Mauritius, Sri Lanka, Maldives, Nepal, Afghanistan, Niger, and Guyana.

He said that India is making development partnerships that are marked by respect, diversity, care for the future, and sustainable development. For India, he added, the most fundamental principle in development cooperation is respecting its partners.