Sri Lanka not caught in a China debt trap, says ambassador to Beijing

Sri Lanka is not caught in a debt trap by China, according to its ambassador in Beijing, as the Indian Ocean island nation seeks help to overcome its most severe economic woes in decades, a situation leading to public unrest and a political crisis for the government.

Speaking with the South China Morning Post on Monday, envoy Palitha Kohona admitted his country was in a difficult situation and had asked for financial support to help it get through the spiralling economic crisis which had led the government to raise interest rates, devalue its currency and curb imports of non-essential goods.

Sri Lankan Ambassador to China Palitha Kohona: "These things happen in democracies, but it doesn't mean that the country doesn't need, or is in the process of discouraging, foreign investments". Photo: Simon Song alt=Sri Lankan Ambassador to China Palitha Kohona: "These things happen in democracies, but it doesn't mean that the country doesn't need, or is in the process of discouraging, foreign investments". 

The anger of its people, who have been struggling with shortages of oil, gas and some food staples, reached a peak in recent days, with protesters defying curfew and taking to the streets, demanding that President Gotabaya Rajapaksa resign.

"The current situation is difficult, but it's the result of a combination of factors really coming together at this very moment and then, naturally, people of the country are feeling the pressure and the pain, and they have the freedom to protest," Kohona said.

"The immediate need is to meet our debt repayments, and our crying need is to finance certain imports, like petroleum, gas and other items like that. No economy can last for too long without petroleum and gas, and without electricity."

Authorities in Sri Lanka have asked for a US$1 billion loan from China to meet the existing repayments to China, and a further US$1.5 billion credit line to buy Chinese goods. Colombo is also expected to discuss a potential loan programme with the Washington-based International Monetary Fund "in the coming days", according to Kohona.

"We've been told that the Chinese government is now in the process of providing the rigid loan and meeting our request."

In addition, Sri Lanka has asked to use part of its US$1.5 billion currency swap with China to buy the goods it needs and there have been talks over whether Chinese investors can use the scheme to fund their projects in Sri Lanka. Colombo has decided to resume negotiations on a free-trade agreement with China, which Kohona said was expected to open up the vast Chinese market to Sri Lankan products.

So far, Beijing has kept a low profile around its financial assistance plan to the cash-strapped country. Last month, when asked if China would extend debt relief to Sri Lanka, Chinese foreign ministry spokesman Zhao Lijian only said that "China has always provided assistance to Sri Lanka's economic and social development within its capabilities and will continue to do so in the future".

And last month, Chinese ambassador to Sri Lanka Qi Zhenhong said the financial support requested by Sri Lanka was being considered but he offered no details.

The ongoing economic crisis in Sri Lanka reignited speculation about whether the country had fallen into a so-called debt trap created by China, but Kohona said such claims were "very mischievous" and were "creating problems when there are no problems".

China accounts for 10 per cent or less of Sri Lanka's external debt, and most of its debt is owed to international bondholders, according to Kohona.

Still, China is often accused of trying to overburden poorer countries such as Sri Lanka with debt by pushing its trillion-dollar Belt and Road Initiative.

Critics often cite the 2017 case in which the then Sri Lankan government decided to lease the strategically located Hambantota port to a Chinese state firm under a 99-year lease as part of a controversial debt-for-equity swap scheme.

Kohona said it was Sri Lanka's own choice to build a seaport in Hambantota, a project supported by two feasibility studies carried out by a Canadian engineering firm and then a Danish consulting firm before its government sought funding from Western funding agencies, and even India, although none was interested.

"Then we approached China, and China did not rush to us with money. It took two or three years of negotiations before it was agreed that the Chinese would fund the Hambantota port," he said. "And it's very important to remember that the money that was received by this lease was not used to repay the Chinese loans but those taken from Western financial institutions."

Critics have blamed mismanagement by successive governments in Sri Lanka, which they said had accumulated a high level of debt on infrastructure. President Rajapaksa's 2019 decision to cut tax also caused a big drop in tax revenue.

However, the Sri Lankan envoy to Beijing said it was wrong to classify the latest economic crisis as part of a debt trap. As in many countries around the world, Sri Lanka's tourism industry - which supported 10 to 15 per cent of Sri Lanka's economy - was hit hard by the Covid-19 pandemic. The Ukraine crisis exacerbated the crisis with Russia, the third largest market for Sri Lanka's tea exports, unable to pay after it was blocked from the Swift global payments system.

Kohona said there was no need to overemphasise Sri Lankan street demonstrations which forced President Rajapaksa to dissolve his cabinet on Monday, bringing even more uncertainty.

He also tried to shore up confidence among foreign investors while acknowledging that they had reason to worry about the uncertain situation in his country.

"It is the right for people to express themselves and we just have to live with it. It's embarrassing for the government but governments do get embarrassed," he said.

"These things happen in democracies, but it doesn't mean that the country doesn't need, or is in the process of discouraging, foreign investments. We do need the foreign investments."