China Refuses to Support Sri Lanka

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What has happened?

As Sri Lanka faces its worst economic crisis in decades and struggles to pay loans, China turns a blind eye after ensnaring the island nation in a debt trap, said a European-based Think Tank.
A major problem that Sri Lanka is facing is its huge foreign debt burden, and it owes over USD 5 billion to China alone.
Sri Lanka’s foreign reserves are shrinking partly because of construction projects built with Chinese loans that are not making money.
Its dollar-denominated debt repayments due this year total more than USD 6 billion, including a sovereign bond of USD 1 billion maturing in July.
There is growing concern among rating agencies and economists that the country would not be able to pay even this, said the think tank.

According to the think tank, China refused to respond to Sri Lanka’s appeal to reschedule its huge debts, and its Ambassador to Sri Lanka said on March 21 that his country was more keen on considering a further USD 1 billion loans and USD 1.5 billion credit line.
As a recent report in the Hong Kong Post put it, the end result of reckless borrowing from China to finance unprofitable infrastructure projects was what had contributed to putting Sri Lanka in this unenviable position to begin with, EFSAS reported.
The report added that “China has shed some crocodile tears over the economy of Sri Lanka getting caught in a quagmire after hobnobbing with the BRI projects of China, record inflation, soaring food prices and the sufferings of the people.
According to World Bank estimates, over half a million Sri Lankans have already fallen below the poverty line since the pandemic struck.
The bank described this as a “huge setback equivalent to five years’ worth of progress”.

Several geopolitical experts cite Sri Lanka as an example of China’s “strategic trap diplomacy or “debt-trap diplomacy”.
Though China’s share in Sri Lanka’s debt officially stands at 10 per cent, the same as Japan, it is not an accurate picture of the situation.
Most Chinese debts are off-the-book. These are commercial lending and never shown in the government record available for public information.

To understand the Sri Lankan chaos and its connection with China’s debt trap, it might be better to understand Laos first.
Laos has emerged as a classic example of China’s debt-trap diplomacy.
China has built a railway line in Laos called the China-Laos rail network in what is referred to as China’s off-the-book lending model.
Talks for the rail network began in the first decade of the century, but the deal was struck under the Belt and Road Initiative (BRI), a pet project of China’s President Xi Jinping.

The railway project was launched in 2015 and inaugurated in the final months of 2021.
It is a $6 billion project, 70% stake of which is directly owned by China.
The project is backed by a group of Chinese government companies and a consortium of Chinese government lenders.
To fund the rest, Laos had to take a $480 million loan from a Chinese bank. On its own, Laos funded only $250 million.

To get the loan to fund its part of the project, Laos had to give a counter-guarantee in the form of the proceeds from its potash mines one of the only few enterprises that is profit-making in the country.
If the debt is not serviced (interest and repayment), China would take over the potash mines.
The project has cost so much to Laos that 45% of its GDP equals its debt to China.
The international creditors downgraded Laos’s credit ratings to “junk” status broadly in the same category as Sri Lanka stands
Facing bankruptcy under the weight of debt, Laos sold a part of its energy grid to China for $600 million to seek debt relief from Chinese creditors in September 2020.
Simply put, to service off-the-book debts taken from the Chinese government companies, Laos sold a major asset to China a year before the railway project could be inaugurated.
Now, Laos hopes to earn profit from the railway network practically owned by China and continue to service Chinese debt. Laos is in China’s trap for the foreseeable future.

The Chinese hand appeared on the Sri Lankan island during its bloody civil war that ended in 2009.
China saw the Sri Lankan civil war as an opportunity to outcompete India.
It supplied weapons to the government, invested money in long-term projects and shielded Sri Lanka in the United Nations using its veto during the civil war.
One of the projects of concern was the development of the Hambantota port in South Sri Lanka.

China’s special focus for lending is the countries that are poor, low-income or facing economic problems.
Its loans to lower and middle-income countries are said to have tripled in 10 years to about $170 billion by 2020.
there are now more than 40 economically weak countries, whose debt exposure to Chinese lenders is more than 10%their GDP due to “hidden debt”.
Some of the countries such as Laos, Zambia and Kyrgyzstan have Chinese debts in excess of 20% of their GDP.

Q) Which among the following fund is used by the government to meet urgent unforeseen expenditure?