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Chinese financial loans for white elephant tasks bring Sri Lanka & Pakistan into present crisis

Sri Lanka And China

The majority of the blame for the problem in these two countries cannot be placed on Beijing’s shoulders, as most of it rests on the myopic leadership of these countries.

Mattala Rajapaksa International Airport, located 18 kilometers from the Chinese-owned Hambantota Port in Sri Lanka, has earned the title of being the world’s least used airport. Both the port and the airport, which were built with high-interest loans from the Chinese EXIM bank during Mahinda Rajapaksa’s presidency, are monuments to budgetary profligacy practised by rulers of the island nation today reeling under grave economic and political crises.

Pakistan, like Sri Lanka, is the largest recipient of Chinese economic aid, and it, too, has plummeted into political and economic disaster. Instead of Chinese loans strengthening the economies of the two countries, the client nations of Beijing have practically collapsed in the aftermath of the global economic crisis triggered by a pandemic that, strangely, originated in Wuhan, China.

Sri Lanka is currently experiencing protests as a result of rising prices; Pakistan is in free fall, with Imran Khan Niazi, now Prime Minister in name only, having completely exposed the Islamic Republic’s democratic fragility for his survival.

The Chinese Communist Party (CCP)-controlled media characterizes Beijing’s predatory economic policies as Western propaganda, claiming that loans to nations such as Pakistan and Sri Lanka represent only a minor fraction of their entire debt portfolios. These Chinese claims are supported by publicly available data on Chinese government-to-government lending. However, this is only half of the story because information on the borrowing countries’ actual obligations or outflows due to guaranteed returns on investments, commercial loans, and so on is not easily available.

As in the case of Pakistan, Beijing has asserted that its loans account for 10% of Sri Lanka’s total external debt. This amounts to USD 5 billion out of total debt of roughly USD 51 billion. However, currency swaps, foreign currency term facility agreements, and loans made by Chinese state-owned firms are not included in this statistic. The Chinese EXIM bank is estimated to have issued USD 4.8 billion in project loans, of which only USD one billion carries a 2% concessional interest rate, while the remaining carries a staggering 6% rate.

In Pakistan, the Chinese EXIM Bank has loaned USD 11 billion (concessional) at a 1.6% interest rate for infrastructure projects and another USD 15.5 billion (commercial) at a 5% to 6% interest rate for power projects as part of the China Pakistan Economic Corridor, which is part of the BRI and is designed to give Beijing access to the Arabian Sea and beyond. All obligations are denominated in US dollars, which hedges China’s vulnerability to exchange rate swings but raises the borrowers’ cost of hard currency. In Pakistan, the debt burden has steadily climbed as the Pakistani Rupee has depreciated at a rate of 6% per year on average. In Sri Lanka, the Lankan Rupee fell in a couple of days, substantially boosting the cost of hard currency.

The majority of the blame for the problem in these two countries cannot be placed on Beijing’s shoulders, as most of it rests on the myopic leadership of these countries. Tempted by the cheap availability of Chinese financing to finance ambitious infrastructure projects that offer the naive public a sense of rapid economic expansion, these politicians threw fiscal discipline and economic sustainability out the window to retain political power. These politically expedient loans have now come back to haunt these two countries, with Beijing oblivious to whether the borrowing regime was corrupt, inefficient, or both.

White elephant projects include the Hambantota Port in Sri Lanka and the Gwadar Port in Pakistan’s restive Baluchistan region. Both ports are ideally positioned, but they are commercially unsustainable due to a lack of traffic. China has already acquired Hambantota, and it is not a stretch to believe that it will also acquire Gwadar in the coming months. The truth is that these ports generate no actual revenue, and cargo traffic is diverted from Colombo and Karachi ports to keep them open. Meanwhile, Mattala airport is occasionally used to store paddy.

The level of profiteering by Chinese corporations that carry out projects is likewise rarely known. It was accidentally demonstrated in Pakistan by the leaked Power Producers Report in April 2020, which looked into, among other things, two thermal power projects in Sahiwal and Port Qasim. Both were carried out by Chinese firms. The report discovered an overpayment of Pak 483.64 billion, or about USD 3 billion, for these two projects totaling USD 3.8 billion.

With no evidence of a resolution to the Ukraine-Russia conflict and portions of China being impacted by the coronavirus, global finance will continue to lag, putting nations like Sri Lanka and Pakistan in the high-risk category for investment due to major political uncertainty. 

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