New data reveals Sri Lankan borrowers owe China’s main policy banks significantly more money than had been previously reported, an important revelation as the embattled South Asian country lobbies its creditors for debt relief.
Chinese loans to Sri Lanka totaled $7.4 billion at the end of last year, accounting for just under 20% of the country’s total external debt, according to a new report by a pair of Sri Lankan scholars, Imesh Moramudali and Thilina Panduwawala, published on Wednesday by the China-Africa Research Initiative (CARI) at Johns Hopkins University.
Many analysts will be surprised by that 20% figure since it’s much higher than earlier estimates that put Chinese debt levels in Sri Lanka at around 10-15%, comparable to Japan’s 9% share at the end of 2021.
Although Indian emergency lending to Sri Lanka has increased considerably this year, New Delhi accounts for just 4% of the total as of May.
Moramudali and Panduwawala found that “a significant portion” of Chinese lending in Sri Lanka went to state-owned enterprises and not the central government as was widely believed. Furthermore, the pair also said that despite widespread concerns about off-book Chinese lending, the researchers “found no deliberately ‘hidden debt’ in China’s lending to Sri Lanka’s public sector.”
This report also adds to the growing body of academic research debunking the “debt trap” narrative that centered on the controversial decision by Colombo to lease the Port of Hambantota back to Chinese operators.
Contrary to what many of China’s critics contend, the authors did not find any asset seizure clauses in the four China Exim Bank loan documents for the port. The port was also not listed as collateral in the event of a default.
Key Highlights From the CARI Report on Chinese Loans to Sri Lanka
- ORIGINS OF THE CRISIS: Sri Lanka’s debt troubles and sovereign default were largely caused by the country’s weak macroeconomic fundamentals and the deepening (since the mid-2000s) of its dependence on commercial debt and export credits to finance its twin deficits.
- COST OF CHINESE BORROWING: During 2008-2021, the effective interest rate on overall Chinese lending averaged 3.2%, higher than average rates on Japanese, World Bank, and ADB loans to Sri Lanka (0.9%-1.6%). But Chinese rates were significantly lower than Sri Lankan Eurobonds which averaged 6.9%.
There has been little progress to date in Sri Lanka’s debt restructuring with its bilateral creditors that will pave the way for a $2.9 billion emergency financial package from the International Monetary Fund.
SUGGESTED READING:
- The China-Africa Research Initiative: Evolution of Chinese Lending to Sri Lanka Since the mid-2000s – Separating Myth from Reality by Umesh Moramudali and Thilina Panduwawala
- Reuters: Sri Lanka’s debt to China close to 20% of public external debt -study by Jorgelina Do Rosario and Rachel Savage
