Sri Lanka caught in ‘strategic debt trap’ faces worst economic crisis

Sri Lanka, a thriving island nation of 22 million people, has finally fallen into the diplomacy of China’s debt trap.

As Sri Lanka faces its worst economic crisis in decades and struggles to repay its loans, China is turning a blind eye after trapping the island nation in debt.

Sri Lanka is currently facing the worst economic crisis since its independence in 1948. The recession is attributed to currency shortages caused by the clampdown on tourism during the COVID-19 pandemic. This has prevented the country from buying enough fuel as people face acute shortages of food and basic necessities, fuel oil and gas.

As economic crisis gripped Sri Lanka, India made serious efforts to bail out its beleaguered neighbor.

Since January, it has helped Sri Lanka with $2.4 billion, including a $400 million currency swap and $500 million loan deferral. Last month, Sri Lanka signed a billion dollar line of credit with India for the purchase of food, medicine and other essential items.

Meanwhile, China has refused to offer concessions in debt repayment. Total debt to China stands at $8 billion, nearly one-sixth of Sri Lanka’s total external debt of $45 billion, the HK Post reported.

A major problem Sri Lanka faces is its huge external debt burden, and it owes more than $5 billion to China alone. Sri Lanka’s foreign exchange reserves are dwindling in part because of construction projects built with Chinese loans that don’t bring in money.

Its dollar-denominated debt repayments due this year total more than $6 billion, including a $1 billion sovereign bond maturing in July, according to think tank European Foundation For South Asian Studies (EFSAS).

Rating agencies and economists are increasingly concerned that the country may not even be able to pay that, EFSAS adds.

China has reportedly refused to heed Sri Lanka’s call to reschedule its huge debts, and its ambassador to Sri Lanka said in March that his country was more eager to consider a new billion-dollar loan and a line. $1.5 billion loan.

As a recent Hong Kong Post report put it, the end result of reckless borrowing from China to fund unprofitable infrastructure projects has helped put Sri Lanka in this unenviable position, to begin with.

The worsening plight of the Lankans has sent alarm bells ringing in neighboring countries like Pakistan where, like Sri Lanka, much of the economic promise is based on Chinese calculations, according to The HK Post.

In another report, the Hong Kong-based publication said Pakistan’s position is the most precarious. The report says Pakistan tops the list of BRI aid recipient countries, with projects worth $27.3 billion.

Similarly, China has trapped Pakistan in the BRI debt trap with high interest rates, rigid repayment terms and lack of transparency.

Even Bangladesh needs to negotiate carefully before signing a financial deal, the report adds. From 2009 to 2019, the Dhaka Tribune found that China invested around $9.75 billion in transport projects in Bangladesh.

“While Pakistan is in a difficult position regarding its indebtedness to China, Bangladesh has been a cautious borrower. Nevertheless, as the second largest recipient of Chinese investment in South Asia after Pakistan, Bangladesh, which imports the largest volume of goods from China, should also be very concerned,” the report added.

(Only the title and image of this report may have been edited by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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