China Played A Big Role In Sri Lanka's Bankruptcy

Sri Lanka enters a new phase of its ongoing turmoil on Wednesday, when the nation's Parliament elects a new president.

Photo Insert: The Central Bank of Sri Lanka

Ishaan Tharoor and Sammy Westfall wrote for the Washington Post on July 20, 2022, that the abrupt departures of President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa, two brothers who dominated the country's politics for more than a decade, occurred in the midst of an astonishing economic collapse that sparked mass protests.

Sri Lanka is bankrupt; it is unable to pay for imports of basic products such as food, medicine, and fuel, in part due to its inability to fulfill current debts due to its essentially empty coffers.

A substantial portion of the country's 22 million inhabitants require food aid due to soaring prices. Schools and many businesses remain closed, while locals wait for days in one-mile-long gas lines.

Sri Lanka has become a cautionary tale of poor governance and disaster for the rest of the world. The profligacy of the Rajapaksa brothers and a mistaken attempt to transform the nation's farming economy into an organic-only operation collided with a number of external causes.

Other debt-ridden nations, from Laos in Southeast Asia to Kenya in East Africa, are teetering on the brink of a similar fate, according to experts.

Other debt-ridden nations, from Laos in Southeast Asia to Kenya in East Africa, are teetering on the brink of a similar fate, according to experts. International Monetary Fund (IMF) Managing Director Kristalina Georgieva said during weekend sessions of the Group of 20 finance ministers.

China is a big factor in Sri Lanka's catastrophe. Beijing is Sri Lanka's sole largest creditor, representing approximately 10 percent of the nation's foreign debt.

Between 2000 and 2020, it extended close to $12 billion in loans to the Sri Lankan government, primarily for a series of major infrastructure projects that became white elephants — including a costly port facility in the Rajapaksas' hometown of Hambantota, which was effectively ceded to Chinese control a half decade ago when Sri Lankan authorities realized they could no longer repay the loans.

Having spent large sums to become the de facto creditor of most of the developing world, Chinese state banks have been more active in debt collection in recent years. Beijing's appetite for risk abroad has been dampened by the faltering domestic economy.

It is widely perceived that Sri Lanka walked into what Beijing critics have dubbed China’s “debt trap” diplomacy. China extended it a $3 billion line of easy credit in 2020 to assist with the repayment of its existing debts.

Sri Lanka chose this approach rather than adopting the more painful steps of restructuring its loans in dialogue with the IMF and enforcing austerity measures to placate the Paris Club, the group of 22 of the world's wealthiest nations and major creditors.

China is not a member of the Paris Club, a reflection of its own geopolitical ambitions and distaste for rules set by other powers.

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