The Sri Lankan central bank has dismissed claims that it is trapped by excessive debt exposure to China, insisting that the south Asian country is encouraging more equity investments from the Asian country than debt.
“There is a misperception,” P Nandalal Weerasinghe, senior deputy governor at the Central Bank of Sri Lanka, told GlobalMarkets in an interview. “If you look at Sri Lanka’s debt, only around 10% is from China. All the Chinese debt is project based, they are 20 to 30 year loans with sustainable grace periods and interest rates that are much below the commercial rates at which we raise international sovereign bonds.
“The perception that we are in a Chinese debt trap is just complete rubbish,” he added. “It’s all rubbish. We’re not in a Chinese or any other debt trap.”
The IMF said in a country report in May that China’s outstanding official loans to the Sri Lankan central government amounted to around $3bn at the end of 2018, or 9% of external central government debt, versus 13% to the ADB, 10% by Japan and 10% by the World Bank.
Equity swap
However, it has become clear over the years that ties between Sri Lanka and China are strong, reflected in the numerous bilateral tie-ups between the two countries on projects and funding. Hambantota Port in the southern coast of Sri Lanka was originally financed using $1.1bn of bilateral loans from China that mature in 15 to 20 years. That loan was restructured in 2017, with Sri Lanka reaching a 99 year concession agreement with China Merchant Port Holdings, which saw the company take an 85% stake in the port and pay Sri Lanka $1.1bn in return.
Weerasinghe admitted that Sri Lanka had a strategic place in China’s Belt and Road initiative but pointed out that the South Asian country had been trying to wean itself off of China debt, by signing equity agreements instead, citing the example of the Hambantota port.
“Our debt exposure has to be reduced not just to China but all the countries. The medium to long-term plan is to address the major reasons for this high debt to GDP ratio, which is that we are running very high fiscal deficits. That is the underlying reason why we have high debt,” he said.
Alicia Garcia Herrero, Asia Pacific chief economist at Natixis and a former IMF economist, told GlobalMarkets that China was not investing in the BRI but was simply lending to the BRI. But she added that it’s not a “debt trap” in the sense that China traps the countries, but instead the countries are trapping themselves. “And they do so because there is more funding available. It is not fair to just blame China for this,” she added.