Who holds Sri Lanka’s external debt and how China is assisting Sri Lanka

Aerial photo taken on 26 Nov. 2021 shows a panoramic view of Colombo Port City in Sri Lanka (China’s CHEC Port City Colombo/Handout via Xinhua)

Aerial photo taken on 6 May 2021 shows a view of Sri Lanka’s Hambantota International Port (Photo by Liu Hongru/Xinhua)

Sri Lanka reached a debt restructuring agreement with commercial creditors in July 2024 to restructure $ 12.5 billion in the country’s outstanding International Sovereign Bonds (ISBs). The parties agreed on core financial terms of restructuring the ISBs, which are now embodied in a joint working debt treatment framework (the Joint Working Framework). The framework proposes a 28% cut on the face value, an 11% reduction on past interest, with interest payments commencing in September. 

However, a new study by UK-based Debt Justice, together with Sri Lankan campaigners Yukthi and the Institute for Political Economy (IPE), shows that Sri Lanka’s bondholders are set to be repaid significantly more than Government creditors such as China, under the restructuring deal. Further study finds that bondholders will be repaid 80 cents for every dollar lent, using the IMF’s own Net Present Value concept. This rises to 98 cents if Sri Lanka’s economy grows more than expected by the IMF. 

In contrast, Government creditors such as China are set to receive 67 cents for every dollar lent, with no increase in payments if economic growth is higher. This level of debt payments will leave Sri Lanka spending over 25% of Government revenue on external debt payments for years to come.

Meanwhile. the Federal Reserve’s aggressive tightening policy has made the US dollar a much stronger currency, that has increased Sri Lanka’s borrowing costs and decreased the value of rupees, that makes Sri Lanka’s external debt payments more difficult, as external debt stocks and debt service payments are mostly denominated in dollars, making it even harder for Sri Lanka to borrow in the open market to finance the budget deficits.

At the end of March 2024, Sri Lanka’s total public debt was USD equivalent 100,184 million. Domestic debt, external debt and the guaranteed debt, accounted for 57%, 37% and 6%, respectively. The table below provides a comprehensive summary of the total public debt of Sri Lanka as at the end of March 2024.

Total Government external debt as at the end of March 2024 amounted to $ 37.0 billion. Commercial debt represented a significant portion of Government external debt which amounted to 40% followed by the multilateral debt (32%) and bilateral debt (28%).

About 85% of the Commercial category debt consisted of International Bond Issuances (ISBs) and the rest from Term Financing Facilities (Syndicated Loans). The Asian Development Bank and the World Bank were the major multilateral creditors representing over 90% of the total multilateral debt. Under Bilateral debt, 60% of its debt is represented by non-Paris Club countries while about 40% from Paris club countries.  

Looking at the numbers, it is obvious that the burden of Sri Lanka’s debt is much heavier than the media portrayed, where the main focus is placed only on major bilateral creditors, while 82% the public debt (commercial and multilateral debt) slips under the radar of the public scrutiny.

Many believe that Sri Lanka’s debt burden was a result of China’s Belt and Road Initiative (BRI) projects like Hambantota Port. Some Western countries, led by the US, and India, have been attacking China’s lending practices as “debt-trap diplomacy”. However, there is no evidence China aims to deliberately push poor countries into debt. According to data from the Sri Lanka Department of External Resources, loans from China accounted for only about 20% of Sri Lanka’s total foreign debt in 2022, and much less than market borrowings and multilateral development banks. Furthermost Chinese loans are concessional and taken for infrastructure and eco-social development.

Since the end of the Sri Lankan civil war in 2009, the Government of Sri Lanka (GOSL) commenced a series of developmental projects – largely focused on infrastructure – to revive its economy. Therefore, the GOSL opted for international assistance for building much-needed infrastructure in a country damaged by three decades of war and civil unrest. 

However, to avoid pressure from global governance institutions such as the IMF and the World Bank to meet Western norms of accountability and conditionality related to political and economic reforms, the GOSL went for an alternative unconditional soft loan. In the meantime, China, in particular, committed billions of dollars for infrastructure investment under the BRI.

Therefore, Sri Lanka became one of the first countries to openly support the BRI, since it is highly compatible with Sri Lanka’s national development strategy. In partnership with BRI, Sri Lanka commenced a series of developmental projects, leading to a huge overhaul of Sri Lankan infrastructure which was dragging on for generations. These include the Colombo-Katunayake Expressway, Southern Expressway, Outer Circular Highway, Hambantota Port, Lakvijaya Power Plant, Colombo International Container Terminals (CICT), Colombo Lotus Tower – Telecommunication Tower, many water projects, etc.

In October 2023, China was the first country to support Sri Lanka over debt restructuring and reached an agreement on debt treatment terms with the Export-Import Bank of China (China Exim Bank) covering about $ 4.2 billion of outstanding debt, which caught the IMF and creditor nations like India by surprise. 

On 26 June 2024 Sri Lanka signed a debt treatment deal in Beijing with China Exim Bank to restructure $ 4.2 billion of debt. This restructuring provides a key step towards restoring Sri Lanka’s long-term debt sustainability, allowing Sri Lanka to allocate more funds to essential public services & resume concessional financing for critical infrastructure development. 

Chinese President Xi Jinping said in March 2024, that China will encourage Chinese enterprises to invest and conduct business in Sri Lanka when he met with Sri Lankan Prime Minister Dinesh Gunawardena, who was on an official visit to China. 

In May 2023, China Merchants Group announced a nearly $ 400 million investment towards constructing a large logistics complex at the Colombo Port, the first major foreign investment to come into Sri Lanka since its default in 2022.

In a landmark move, the Hambantota International Port (HIP) added a new business portfolio and commenced container transshipment service. HIP’s operations in container transshipment service are expected to enhance Sri Lanka’s position in the marine connectivity index for the South Asian region. HIP is also planning to expand the container transshipment service by investing in equipment and other infrastructure facilities, enabling it to service larger vessels on the east west shipping route. 

HIP also got the approval from the Sri Lankan Government to facilitate the shipping connectivity between HIP and the PoC. Through this approval, local importers and exporters would be able to make direct shipments and/or transshipment of cargo to and from HIP to POC and vice-versa. 

Chinese state-owned oil and gas giant China Petrochemical Corporation, or Sinopec has proposed to fully finance the $ 4 billion construction of a refinery in Hambantota and the Sri Lankan government has awarded the investment to Sinopec in November 2023, marking the largest foreign direct investment in Sri Lanka. 

The introduction of container services through HIP is expected to bring investors in the Hambantota Port Industrial Zone that will now benefit from directly importing their raw material requirements for production and the export of their finished products directly through HIP.

The China Harbour Engineering Company Ltd. (CHEC), a subsidiary of state-run China Communications Construction Company (CCCC) Ltd., is interested in establishing a 15,000 acres (6,070 hectares) industrial zone for industry and logistics next to HIP.

In October 2023, Port City Economic Commission, China Harbour Engineering Company, Browns Investments and Hunan Construction Investment Group signed the groundbreaking $ 1.565 billion corporation framework agreement in Beijing for the Phase 2 development of the Sri Lanka’s Port City Colombo (PCC) project with the agreement covering the development of the Marina Project and Marina Hotel Project and the CIFC Mixed Development Project.

On 12 March 2024, the PCC marked a significant milestone with the ground-breaking ceremony for its premier business park, the Business Centre. The Business Centre will feature distinct zones – an IT Park and a Commercial District – all with a focus on sustainability through modern workspaces like garden offices.

Recently, China Duty Free (CDF) has been granted status as Businesses of Strategic Importance (BSI) in PCC to operate in the Downtown Duty-Free Mall which is expected to open before September 2024. China Duty Free is ranked as the world’s number one travel retailer, having recorded a revenue of $ 9.3 billion in 2023, according to a recently released Moodie Davit Report. China Duty Free is an entity owned by China Tourism Group, one of the largest tour operators in the world. China Duty Free, operating in numerous ports in China and some countries in Asia, expected to bring luxury brands to the duty-free malls and is also expected to bring more Chinese tourists into the country.

China also expected to resume Central Expressway Section 1 from Kadawatha to Meerigama. China is also interested in investing in Central Expressway Section 3 and Elevated Highway from New Kelani Bridge to Athurugiriya. 

Recently the Sri Lankan Government signed a Letter of Exchange with the China International Development Cooperation Agency (CIDCA) to commence the Digital Transformation of General Education Project under the China-Aid Program. The primary focus of the grant is to establish state-of-the-art educational infrastructure, including a cutting-edge Educational Data Centre, a Multimedia Distance Learning and Conference Solution and a National Streaming Hub. This initiative aims to enhance the teaching and learning experience, facilitating ongoing education sector reforms to achieve education equity through digital transformation. In its initial phase, the project will implement advanced smart classroom solutions with interactive high-definition distance learning features, covering 900 classrooms across 500 schools. 

Moreover, China also gifted and fully financed prominent landmarks such as the Bandaranaike Memorial International Conference Hall (BMICH), the Supreme Court Complex, Nelum Pokuna Theatre, National Nephrology Specialist Hospital, Outpatient building of Sri Lanka’s National Hospital, and Water Research Institute at the University of Peradeniya among others. 

Sri Lanka and China are traditional friendly countries with the relations dating back over many Centuries. Sri Lanka also played an active role in the ancient Silk route of the ocean. The relations between the two countries have developed steadily, and in recent years, China-Sri Lanka relations have entered into a new era of strategic cooperative partnership. 

Being an acting member of the BRI, it’s expected to provide a significant boost to Sri Lanka’s economy through investments in infrastructure, increased trade, access to new markets and opportunities for trade and investment and job creation.

Reference: 

https://www.treasury.gov.lk/api/file/1f884c2c-71db-4058-9b99-a9cb7f0690b7

(The writer currently serves as a Director of BRISL, an independent and pioneering Sri Lankan-led organisation, with strong expertise in BRI advice and support. He can be contacted at: [email protected].)