As Sri Lanka faces a debt trap, China’s global image is in jeopardy

Faced with a severe financial crisis, Sri Lanka requested $2.5 billion in emergency aid from China. China said on Friday that it would give Sri Lanka $31 million in “urgent emergency humanitarian aid” a few weeks after the country asked for money.

Since Chinese Foreign Minister Wang Yi visited Colombo on January 10, Sri Lanka has been attempting to postpone the repayment of $11 billion in Chinese loans. The request has gone unanswered by China.

China has spent years attempting to project a global image of being a trustworthy ally to poor countries. However, Sri Lankan politicians, especially President Gotabaya Rajapaksa, have put that reputation to the test by asking for bailout money over and over again in front of the public.

It’s important that China has a good image because it wants a lot of other countries to accept its plan to build a lot of infrastructures. Since 2013, Beijing has invested more than $800 billion in BRI projects. China’s aim is to sell more commodities and get contracts for its construction enterprises, as well as challenge “American hegemony.”

On the other hand, others, notably the United States, have accused China of engaging in “debt-trap diplomacy” in order to pull economically weak countries to their knees and make them dependent on China for support. Such allegations are denied by Chinese representatives.

Analysts and diplomats are surprised by China’s unwillingness to roll over BRI loans.

Ganeshan Wignaraja, a senior fellow at the National University of Singapore, told VOA that China has been hesitant to approve Sri Lanka’s moratoria or debt restructuring.

He said China is concerned that this may set a new precedent in its lending procedures. It doesn’t want to start talks with other heavily indebted countries that have gotten a lot of money from China’s Belt and Road project.

Before the COVID pandemic shut down tourism and cut remittances from Sri Lankans working outside the country, the government cut taxes a lot. Sri Lanka had to buy rice from other countries at inflated prices because it couldn’t grow enough rice on its own.

Sri Lanka is seeking assistance from the International Monetary Fund (IMF) due to the pressure of a $51 billion foreign debt. This includes $11 billion in BRI projects from China. This includes $11 billion spent on BRI projects in Sri Lanka by Chinese lenders.

One of the associate fellows at the Manohar Parrikar Institute for Defense Studies and Analyses in New Delhi says that China isn’t renegotiating its loans with Sri Lanka because it has a secret goal.

China, according to her, seeks to profit from Sri Lanka’s failure to repay debts on time. Beijing is holding off on entering into a debt-to-equity swap and acquiring land in Sri Lanka until market conditions are favorable. Loans made in the past would be turned into equity, giving China a stake in the Sri Lankan business.

Sultana cited the example of the Chinese-funded Hambantota port project, which was placed through the exchange mechanism in 2017 after Sri Lanka defaulted on its debt repayments. China obtained 70% ownership of the port after converting loans into equity.

In terms of ongoing Chinese-funded initiatives, Sri Lanka is in a tough position. Sultana says that if Sri Lanka doesn’t finish the projects to avoid getting more loans, it will have to pay China because it didn’t work on them.

Beijing doesn’t care that a bad review of Sri Lanka’s reputation could hurt BRI projects in other places.

Different countries choose Chinese loans because they lack the necessary finances for new projects, according to Sultana. When making judgments, they do not always consider China’s global image. They evaluate their immediate circumstances and whether other countries have offered support.

Verite Research, a Colombo-based think tank, took a different approach, claiming that China is not totally to blame for Sri Lanka’s problems. According to the report, China has only made up 15% of Sri Lanka’s foreign debt. Most of the country’s money comes from sovereign bonds sold in other countries.

While Sri Lanka has been painted as the poster child for sliding into the Chinese debt trap, with many believing that the country’s sovereignty and geopolitical space have been jeopardized, Verité Research’s recent findings tell a different narrative, according to an article published on its website. According to Verité Research, China accounts for less than 15% of Sri Lanka’s total external debt.