On July 29, Sri Lanka and China signed the Hambantota Port Concession Agreement in which China agreed to pay USD 1.1 billion in a debt-equity swap and an 80:20 profit share between China and Sri Lanka was agreed. On July 25, the Sri Lankan Cabinet approved the agreement. Though it was presented in Parliament, no meaningful discussion could take place. And although Parliament is scheduled to discuss the port deal on August 8 and there is a possibility of some clauses being revised as promised by the government, the fact of the matter is that China has controlling stake in the port which has been leased to it for 99 years. Despite the possibility of buying back the shares from China after 60 years, the question is whether Sri Lanka's economy would allow it to buy them back. The fear expressed by economists in Sri Lanka is that the country is likely to fall into a Chinese debt-trap.
Already the Sri Lankan economy is showing signs of distress. According to World Bank data, 80 percent of its budget is devoted to debt servicing. As a result GDP growth dipped to 3.5 percent last year and the USD 1.1b debt-equity swap would help its economy marginally. The framework agreement for Hambantota was signed on December 8, 2016 between the Ministries of Ports and Shipping, Ministry of Development Strategies and International Trade of Sri Lanka and China Merchants Holdings Ltd for the 'revitalisation' of the Hambantota Port based on a private-public partnership (PPP) model. According to the revised agreement signed on July 29, 69.55 percent stake in the port has been given to China Merchants Port Holdings Company Ltd (CMPort) and 30.45 percent to the Sri Lanka Port Authority (SLPA). However, China has 85 percent controlling stakes in the Hambantota International Port Group (Pvt) Ltd (HIPG) and the Hambantota International Port Services Co (Pvt) Ltd (HIPS). These have raised question regarding control over the port.
And the deal has been criticised by the Mahinda Rajapaksa faction of the Sri Lanka Freedom Party (SLFP), popularly known as the 'Joint Opposition'. Rajapaksa supported the demonstration carried out by locals against the handing over of the 15,000 acres of land to China. Mahinda Rajapaksa, who is the main architect behind Chinese investments in Sri Lanka, in a statement, said that he will scrap the proposed Industrial Park that is built on land forcibly taken over by the government from the people. Keeping in mind the protest, the government has decided that only 1,115 hectares of the 1,574 hectare gazetted land will be leased out under the agreement. However, that has not pacified the political opponents who argue that the SLPA was in a position to pay back the debt. The government has dismissed this argument and have cited that since 2011 the SLPA has paid China LKR 47 billion for constructing the Hambantota port, which is equivalent to Rs 9.1 billion annually. And this is not sustainable as outstanding debt of the SLPA at the end of 2016 increased to LKR 237 billion. Interest costs account for almost 28 percent of their operating costs, which has increased by 14 percent in 2016, giving rise to concerns over debt sustainability.
Though both the Colombo Port City Project and the Hambantota Port were renegotiated after the Sirisena-Wickramasinghe government came to power to address the concerns that were raised at home and also by India, there is fear that the burden of debt would cripple Sri Lanka's economy and would have foreign policy implications. The Mattala Rajapaksa International Airport (MRIA) which was built at a cost of USD 272 million, including a USD 247 million loan from China, has remained unused apart from being used to store grain by the government. Last year in June, MRIA called for expressions of interest from investors to undertake investments and commercial operations of the airport and received expression of interest from seven European companies. The airport has been declared a free trade zone and the government has adopted an open sky policy to increase its commercial viability.
The larger issue is that while the Rajapaksa regime built these infrastructures without assessing their economic viability, the country still has to pay the burgeoning Chinese debt. The Chinese were willing to invest money as it would provide them a foothold in Sri Lanka, which is strategically located in the Indian Ocean. They found a willing partner in Rajapaksa, who was more than willing to court China to keep India and US—the two countries that pressurised the government to politically resolve the Tamil conflict—at bay. Though the Sirisena-Wickramasinghe government tried their best to renegotiate some of the agreements concluded by the previous government, it was not left with any option other than to provide the Chinese a larger controlling stake in the port. China has returned to Sri Lanka, but this time with controlling stakes in major infrastructure built with huge amounts of commercial loans from China. As China expands its presence in the Indian Ocean and pilots the economy of the debt-torn country, it will have strategic implications for countries of the region that are increasing looking for no-strings-attached loans to develop infrastructure in their quest for economic growth.
Smruti S Pattanaik is a Research Fellow at the Institute for Defence Studies and Analyses (IDSA).