The Japanese media broke the news that the Chinese Communist Party seems to be tightening its strategic control over Sri Lanka by providing another $500 million loan to the debt-ridden South Asian country. But behind this loan lie conditions that are not favorable to the country’s sovereignty.
The Nikkei Asian Review reported on April 20 that Sri Lanka’s foreign exchange reserves fell to $4.05 billion in March this year, the lowest in more than a decade. The country’s tourism industry has plummeted, export earnings and foreign remittances have plummeted, and the treasury has taken a huge hit due to the impact of the Communist virus (coronavirus) pandemic. Dwindling foreign exchange reserves have also caused the currency to plummet to a record low of 203 Sri Lankan rupees to the US dollar.
The Communist Party’s China Development Bank recently gave Sri Lanka a $500 million loan, the second tranche of a $1 billion loan Colombo sought from Beijing last year when the epidemic hit. The latest loan comes just weeks after the Chinese Communist Party approved a $1.5 billion currency swap with Sri Lanka.
The negotiations for the loan funds took a year, the report said. According to Sri Lankan Finance Minister S. R. Attygalle, the signing of the memorandum of understanding was delayed because the epidemic prevented the two leaders from meeting to sign the agreement. However, Sri Lankan finance ministry officials attributed the delay to “tense” negotiations.
Hidden Conditions Behind Loan Agreement
The Chinese Communist Party appears to be hiding undisclosed conditions behind its loan offer. The Nikkei said that while the loan agreement’s paperwork appears simple, with a 10-year repayment term and a three-year grace period, the Communist Party appears to have obtained informal assurances from Sri Lanka that the country will drop any plans to renegotiate its 99-year lease on the Port of Hambantota with the Communist Party and will fast-track a controversial bill that is thought to that would give the Communist Party broad powers to oversee the Colombo Port City project, a $1.4 billion “financial hub” to be built on an artificial island off the coast of Colombo.
At least 19 petitions have been filed in the Supreme Court challenging the constitutionality of the Colombo Port City Economic Council Bill as the Sri Lankan government attempts to fast-track its passage through parliament. The petitioners include opposition political parties, the Sri Lanka Bar Association, Transparency International and several other civil society organizations. They claim that the creation of the Port City Council by the bill undermines Sri Lanka’s territorial integrity and sovereignty.
Analysts believe that the agreement on the second tranche of the loan may also have been delayed due to the downgrading of Sri Lanka’s sovereign debt by the three major rating agencies for sovereign debt and discussions between the two sides over possible collateral for the loan. However, Sri Lanka’s Ambassador to China Palitha Kohona argued that the issue of collateral was not discussed in the talks.
W.A. Wijewardena, a former deputy governor of the Central Bank, told Nikkei that such bilateral assistance is not dictated by economic conditions but by geopolitical conditions. Seeking the support of the Chinese Communist Party is not an unusual move for the country. But given the severity of the problem, Sri Lanka will have to pay off its $8 billion foreign debt in the next 12 months by reducing its foreign reserves.
How the Chinese Communist Party gained control of the Hambantota port
The Communist Party of China (CPC) has been promoting the “One Belt, One Road” initiative around the world in recent years, prompting condemnation from the West. Former U.S. Vice President Mike Pence called it a “road of no return” to bind other countries and a “debt trap diplomacy” to expand the CCP’s global influence. The Trump administration has denounced the Belt and Road as a way for partner countries to borrow money from the Chinese Communist Party to pay for Chinese contractors to build infrastructure projects that the partner countries cannot afford. When partner countries are unable to pay their debts, the Chinese Communist Party takes advantage of the opportunity to plunder their strategic resources.
Sri Lanka is a key country in the “Belt and Road” initiative. The country has loaned billions of dollars to the Chinese Communist Party for infrastructure development. Critics say this has led the country into a debt quagmire, with much of the government’s finances being used to repay the loans.
Insolvency forced Sri Lanka to sublease the strategic Hambantota port and 15,000 acres of land around it in the south of the country to China for 99 years in 2017. The move sparked a great deal of condemnation and protest in Sri Lanka, with protesters saying the country’s sovereignty has been violated.
Just days after Sri Lankan President Gotabaya Rajapaksa was elected in 2019, he told an Indian journalist that the 99-year lease on the Hambantota port was a bad deal made by the previous Sri Lankan government and that he would renegotiate it.
But Sri Lanka’s ambassador to China Kokona, representing the government, told the Nikkei when he signed the $500 million loan deal last week that the Hambantota port deal was a business transaction, however ill-advised, struck by the previous government. “Any adjustment needs to take this and other political and economic factors into account.”
The Chinese Communist Party has provided what are usually high-interest loans to partner countries. Pakistan’s Minister of Ports and Shipping Hasil Bizenjo had disclosed on Nov. 24, 2017, that for the $16 billion loan from the CCP to develop the country’s Gwadar port, free trade zone and all communications infrastructure, the Pakistani side, in turn, would have to pay a high interest rate of more than 13 percent, including a 7 percent insurance premium.
Sergi Lanau, deputy chief economist at the Washington-based Institute of International Finance, told the Nikkei that Sri Lanka was advised to work with the International Monetary Fund to make it easier to borrow at a reasonable cost.
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