China’s Loans To Sri Lanka Have Been ‘Quasi-Predatory,’ Says Lankan Economist

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Dr. Muttukrishna Sarvananthan prefers to consider Chinese loans to be “quasi-predatory” rather than “predatory”, taking into account the comparatively low-interest rates they carry.

Dr. Muttukrishna Sarvananthan of Point Institute of Development in Jaffna, says that Chinese lending to Sri Lanka between 2007 and 2022 was marked by an absence of due diligence, hidden conditions and aggressive lobbying with Sri Lankan politicians and bureaucrats. These are “predatory”. But considering the lower rates of interest charged, the lending could be termed “quasi- predatory”, he says. 

Sarvananthan’s contentions are found in his critique of “Evolution of Chinese Lending to Sri Lanka since the mid-2000s – Separating Myth from Reality” written by Umesh Moramudali and Thilina Panduwawala and published by the China-Africa Research Initiative of the School of Advanced International Studies (SAIS) at the Johns Hopkins University.

In the critique entitled Chinese Lending to Sri Lanka: A Factual cum Reality Check: A Rejoinder to  Umesh Moramusali and Thilina  Panduwawala, Sarvananthan agrees that the leasing of the Hambantota International Port (HIP) to a Chinese company in 2017 was neither an “asset seizure” nor a “debt-to-equity swap.”  It was not an “asset seizure” because the port was never made collateral for the loans from the China Exim Bank. It was not a “debt-to-equity swap” either, because the money received for granting 85% of the equity stake to the China Harbor Group was not utilized to repay the loans borrowed for the purpose of building and expanding the port. 

As Moramudali and Panduwawala point out, the funds obtained from the Chinese company for leasing the port for 99 years, were used to pay off Sri Lanka’s International Sovereign Bonds (ISB). 

But this was malpractice, Savananthan contends. “The utilization of the proceeds of the leasing of the HIP to augment the balance-of-payments or for the repayment of a maturing ISB/s is a dubious accounting practice of the Government of Sri Lanka and a gross violation of the International Public Sector Accounting Standards of an accountable democratic state,” he says.   

The Chinese lender (EXIM Bank of China) had also erred, he adds. “If it is indeed a responsible and accountable state-owned lender of the world’s second-largest economy, the EXIM Bank of China should have insisted that the money paid by the China Harbor Group (CHG) to the Government of Sri Lanka (GOSL) for the acquisition of 85% equity stake in the HIP should be channeled to repay the loans obtained from the EXIM Bank of China to build and subsequently expand the HIP.”

“If the lender for the HIP was a state-owned bank from a Development Assistance Committee (DAC) member bilateral donor, the foregoing dubious transaction by the GoSL would not have been allowed.”.

Hidden Debt  

Moramudali and Panduwawala found that the loans obtained from China for Hambantota port (HIP) were being serviced by the Treasury of Sri Lanka. In 2017, the Treasury had taken over these loans from the balance sheet of the Sri Lanka Ports Authority (SLPA). Between 2013-2017, these HIP loans were included in the balance sheet of the SLPA as a “non-guaranteed” foreign loan to the SLPA. 

This is a “classic example of a hidden debt,” Sarvananthan says. Neither the GoSL nor the Chinese lender was transparent as per international practice, he notes. 

According to Moramudali and Panduwawala, the “Auditor General noted that the outstanding balance of four China EXIM loans for Hambantota port construction were not recorded in the government’s outstanding debt stock. While debt repayments were made on time by the Treasury and tracked by the ERD (External Resources Department of the Central Bank) outstanding loan amounts were not recorded by the SLPA or the Treasury in annual balance sheets.”   

Moramudali and Panduwawala further pointed out that the signing of all five loan agreements between SLPA and a Chinese supplier or contractors responsible for constructing the port, had taken place months before the signing of the loan agreement between the GoSL and ChEXIM. To Sarvananthan, this is another example of the “predatory nature” of the Chinese loans for the Hambantota port. He asks: “How could the SLPA sign contracts with Chinese suppliers and contractors even before the loan agreement was signed?” 

Sarvananthan points out that the 6.3% interest charged on the first agreement dated October 30, 2007, for a loan of US$ 307 million, and 6.5% interest charged on the second agreement dated August 06, 2009, for a loan of US$ 65 million for the Hambantota port by the Exim Bank of China were “exorbitant” given the fact that the effective LIBOR (London Inter-Bank Offered Rate) was just 2% in 2009. 

Predatory Lending  

Sarvananthan defines predatory lending as “severe conditions” that can be aggressive sales/lobbying tactics, very high-interest rates (usually 3-digit interest rates), overcharging for administrative costs, non-disclosure of risk factors by the lender, failure to carry out due diligence with regard to the technical feasibility and/or financial viability of a particular project, or very high collateral requirement, a very stringent penalty in the event of default, or a combination of the foregoing.”  

Failing to carry out due diligence with regard to the financial viability/commercial potential of most of the projects funded by China in Sri Lanka would also fall in that category. Due diligence was lacking in the case of the Hambantota port, the Mattala airport, Colombo Lotus Tower and Sri Lanka’s capacity to repay was also not factored in, Sarbananthan points out. 

Sarvananthan considers lobbying for projects aggressively by  submitting unsolicited project proposals with suggestions for Chinese funding mechanisms as predatory. “Chinese state-owned companies could also be potentially involved in bribing politicians and/or bureaucrats in their host countries, which is termed corrosive capital,” Dr.Sarvananthan alleges.  

Dubious Cancellations

The Jaffna-based economist considers the abrupt and arbitrary cancellation of the Japan International Cooperation Agency (JICA) funded US$ 1.6 billion Light Rail (LRT) project in Colombo in 2020 dubious. He points out that immediately after the cancellation of the LRT project in January 2020, the China Harbor Engineering Corporation (CHEC) was given the contract to build an elevated highway connecting the Colombo Port City and Thalawathugoda (replacing the proposed LRT system) without calling for open tender. 

“This is a classic case of project grabbing by Chinese state-owned companies and predatory lending by Chinese state-owned financial institutions,” Sarvananthan asserts.

Similarly, the East Container Terminal (ECT) of the Colombo port was to be developed jointly by India, Japan, and a local private company (John Keels Holdings) in terms of a trilateral agreement signed in 2017.  But this was abruptly abrogated by the government in 2021 with the purported view to developing it entirely by the Sri Lanka Ports Authority (SLPA). However, in January 2022, it was reported that the ECT is to be jointly developed by China Harbor Engineering Corporation (CHEC) in partnership with a local company, Access Engineering, Sarvananthan says.     

Citing another example, the Lankan economist says Sri Lanka bought Sinovac COVID-19 vaccines in June 2021 from China due to the delay in receiving the second dose of AstraZeneca COVID-19 vaccines from India. There were allegations in the media that the Ministry of Health was paying a higher price to purchase Sinovac from China than the price paid to AstraZeneca from India. 

“When a journalist requested the Ministry of Health to disclose the purchase price of Sinovac, it refused to disclose the price because of a gagging agreement between the Chinese Embassy in Colombo and the local company involved in the purchase on behalf of the Ministry of Health. It was reported that the Chinese Embassy in Colombo had informed the Ministry of Health that if the purchase price was made public the order will be cancelled, ostensibly because of a ‘special price’ offered to Sri Lanka,” Sarvananthan says.  

“It is this kind of non-transparency in the official business dealings between China and Sri Lanka that leads to accusations of predatory practices,” he observes.      

However, Sarvananthan prefers to consider Chinese loans to be “quasi-predatory” rather than “predatory”, taking into account the comparatively low-interest rates they carry.

P. K. Balachandran

P. K. Balachandran is a senior Indian journalist working in Sri Lanka for local and international media and has been writing on South Asian issues for the past 21 years.

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