China’s recipe for Sri Lanka’s economic recovery

During his visit to Sri Lanka on January 8 and 9, the Chinese Foreign Minister, Wang Yi, had clearly indicated that China is keen on going beyond infrastructural development to investing in industries in the island nation to help it industrialize and develop a “Made in Sri Lanka” brand.

He also urged an early conclusion of the long drawn out negotiations on a Sino-Lankan Free Trade Agreement so that the island’s economy is put on a more solid and modern footing, based on investment and trade.

These proposals are meant to strengthen the Sri Lankan economy and enable it to earn enough to repay debts even as they release China from the charge across the world that it is on a lending spree in poor countries with the aim of taking over their assets if they fail to repay the loans. China is widely accused of practising- “debt-trap diplomacy.”

In Sri Lanka, so far, China has built massive infrastructural facilities like the Hambantota port, the Mattala airport, the Colombo International Container Terminal, the Colombo Port City, the Lotus Tower, a kidney Disease hospital in Polonnaruwa and several highway and railway links. With the result, today, China is the single largest lender to Sri Lanka having displaced Japan. But still, China accounted for only a little over 10% of Sri Lanka’s external debt of US$ 51 billion in 2021.

Yet, the taking over of the Hambantota port on a 99-year lease following the inability of the Lankan government to pay back the US$ 1.1 billion loan taken from China to build the harbor, is widely cited as a classic case of China’s “debt diplomacy”. However, over time, these projects, barring a few like the Lotus Tower, have started generating income. Even the classic White Elephants, the Hambantota port and the Mattala Airport derided by Forbes as the “World’s Emptiest Airport”, are earning money now.

If they took so long to yield returns it was not the fault of China or the assets, but the Sri Lankan government’s lack of interest in making use of the assets in a creative way. For instance, India had submitted a plan to use Mattala airport for domestic flights through a joint venture, but the previous Mathripala Sirisena-Ranil Wickremesinghe government used it for “grain storage”. However, since the Rajapaksa came back to power, the airport has been attracting flights.

In April 2021, the Lankan Minister of Tourism Prasanna Ranatunga stated in parliament that the Mattala International Airport had earned an income of LKR 445 million from its opening to traffic in November 20, 2020. The Minister said that since the opening of the airport, 10,266 aircraft and 58,651 passengers arrived and 73,513 passengers took off.

As for the Humbantota port, it is attracting traffic and will see a jump when plans to build facilities in the hinterland are implemented. According to the website of Hellenic Shipping News, in September 2021, the China Merchants Port Holdings (CMPH) which operates Humbantota port, declared a dividend of LKR 1.05 billion to the Sri Lanka Port Authority (SLPA), while announcing that its first half net profit had shot up by 204.7% to HK$4.71 billion (Rs 120.61 billion), from HK$1.54 billion in 2020.

For the first half of 2021, Hambantota International Port Group handled 790,000 tonnes of bulk cargo. Bulk cargo volume vaulted by 338.9% from the year before. The roll-on/roll-off terminal handled 281,000 vehicles in the first half, up by 56.2% year-on-year. The Humbantota Industrial Park had signed up 27 enterprises, the company said. It is gearing up to become a fully-functional multi-purpose port next year.

The US$ 1.4 billion Colombo Port City constructed by the China Harbor Company, began humming with activity recently, after the Lankan government, at long last, gave it proper legal structure. Designed to be an international financial hub it is expecting two big-ticket Chinese financial companies to set other international investments in motion, according to the Lankan envoy in Beijing Dr.Palitha Kohona.

There is criticism that about 88 hectares were leased to China for 99 years and another 20 hectares were given on freehold to China in the Colombo Port City. But this was done to compensate for the loss of US$ 380,000 per day due to work stoppage caused by a government inquiry which eventually found no wrong doing.

Alternative to Debt Restructuring

Since Sri Lanka is in the thick of a grave financial crisis. Its President Gotabaya Rajapaksa had sought debt restructuring when the Chinese Foreign Minister called on him on January 9. It appears that Wang did not commit himself to restructuring as such but said that China would assist Sri Lanka “in overcoming the temporary difficulties within its capacity.” But he assured Sri Lankan leaders that he would encourage Chinese companies to invest in Sri Lanka to make Sri Lanka industrialize and establish a “Made in Sri Lanka” brand.

“China will continue to assist Sri Lanka in overcoming temporary difficulties within our capacity. We are convinced that Sri Lanka’s economy will walk out of the current predicament and achieve new and greater progress. Colombo Port City and Hambantota Port are the flagship projects of bilateral cooperation in building the Marine Silk Road, and two engines of Sri Lanka’s economic development. China supports Chinese enterprises in investing and developing in Sri Lanka and combining Chinese capital and experience with Sri Lanka’s human resources advantages to help Sri Lanka improve the ability of self-development, accelerate industrialization, and build the brand of Made in Sri Lanka,” Wang told Lankan Prime Minister Mahinda Rajapaksa.

Wang stressed the need to conclude a China-Sri Lanka Free Trade Agreement which had run into opposition from Lankan nationalists.

“Sri Lanka and China should make good use of the two engines, Colombo Port City and Hambantota Port flagship projects, tap the opportunities of the enforcement of the Regional Comprehensive Economic Partnership and China’s vast market, and discuss the restart of talks on a free trade agreement between China and Sri Lanka to send more positive signals to the world and contribute to Sri Lanka’s economic recovery and development.” Wang told President Gotabaya Rajapaksa.