China can't be absolved of Sri Lanka's collapse

Wickremesinghe’s one-sided win was because he had the support of the Rajapaksa clan’s party. Although he has experience negotiating with the IMF, his election may bring protestors back to the streets because he is seen as the Rajapaksas’ man. Sri Lanka’s problems verge on the insurmountable: forex reserves have dwindled to tens of millions. While Indian credit helped Sri Lanka import fuel as the crisis worsened, Weerasinghe in his 16 July interview said there had been “no progress on a $1 billion currency swap with the Reserve Bank of India, nor has China relaxed conditions to allow Sri Lanka to use a $1.5 billion currency swap." China’s swap came with peculiar conditions: Sri Lanka could not use it to pay for food, fuel and medicines, Nikkei Asia reported in May.

While some Indian commentators have rushed to absolve Beijing by pointing out that only a minority share of Sri Lanka’s total debt is owed to China, the fact is that decision-making concentrated within the Rajapaksa family and Beijing’s willingness to provide credit via unorthodox lending frameworks fuelled the island nation’s debt spiral. The Rajapaksas’ infrastructure binge, ranging from building an airport that received few flights to a gigantic Colombo port city financed with loans from Chinese entities, seemed akin to watching a gambler lose big bets only to return to the casino and stubbornly stake everything as collateral.

Between 2000 and 2020, China extended almost $12 billion in infrastructure loans to Sri Lanka, usually for projects that its state-linked and private construction companies built. In a recurring feature of debt crises, including the Asian crisis of 1997, its debt and interest payments were dollar-denominated, while revenues, often much lower than projected, were in Sri Lankan rupees. In 2010, I travelled to Hambantota to report on a building spree in the Rajapaksa family constituency. I found myself peering over a cliff at camps of Chinese workers that had sprung up to build a deep-water port there. Even then, it was obvious there was no need for a second international airport that was being built nearby. (The Mattale airport would eventually get one flight a day—from China.) There were raucous celebrations to mark the election of the president’s son, Namal, as a member of parliament in his father Mahinda’s constituency. This was a reminder of the huge support that the Rajapaksas then enjoyed for securing a victory against the Tamil Tigers.

A majoritarian tilt by the Rajapaksa government against minority Tamil Hindus and Muslims and gratitude for the end of the civil war gave the family a stranglehold over Sri Lankan politics. Even when the Hambantota port struggled to repay its loan and the nearby airport turned into an expensive joke, few questions were asked. In 2017, in a restructuring of the Hambantota port project, Colombo gave a Chinese state company a 99-year-lease on it. On my 2010 trip, I visited another white elephant, a Chinese-built national centre for performing arts shaped like a lotus and named after Mahinda Rajapaksa.

One has to revisit the Latin American debt debacles decades ago to even conceptualize the loss in income that Sri Lanka will undergo over the next few years. Creditor agreements will be complicated by Beijing’s apparent rejection of the global convention of writing down loans when a borrower simply can’t repay. In its variation of ‘extend and pretend’ debt (mis)management, Beijing usually extends the tenure of loans but seeks to ensure full principal repayment. For it, a lender-borrower deal on a debt rejig that involves a big write-off of the principal is an alien concept. Having delayed a rework in late 2021 of Zambia’s debts, Beijing is understood to have initially accepted an IMF restructuring plan for Sri Lanka, but progress has stalled. Verite Research in Colombo calculates that interest rates on Chinese loans averaged 3.3%, well above the 0.7% for Japan’s. Plus, Chinese debt in Sri Lanka has a maturity period of about 18 years versus about 34 years for Japan.

The fleeing of Gotabaya Rajapaksa and the festivities that took place in his presidential palace brought to mind Gabriel Garcia Marquez’s The Autumn of the Patriarch. In that novel, a long-oppressed citizenry took over the dictator’s palace in an unnamed Central American country only after vultures had pecked through window screens, signalling the dictator was dead. By then, the dictator had sold off the entire Caribbean Sea to the US, which used giant suction machines to transport it in sections to landlocked Arizona. Thankfully, Sri Lanka’s pristine beaches are unlikely to endure that fate. But, South Asia’s most beautiful seaside destination, which was also a country of gracious smiles, will sadly resemble a shipwreck for years to come.

Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.