Checkpoint Asia

Whose “Debt Trap”? Chinese Loans Account for Just 10 Percent of Sri Lanka’s Runaway Debt

Actually Sri Lanka is running austerity measures to service its loans to West and Japan-controlled financial institutions

If the country is in a “debt trap” it’s not of China’s making

This may come as shock to many, but it is in the best interest of Europe that it joins China’s Belt and Road Initiative. Contrary to the anti-China rhetoric, the BRI is not a “debt trap,” but in fact a brilliant vehicle to promote economic growth and geopolitical stability across the globe.

Sri Lanka, the country China critics like to use as an example of Chinese “debt trap” diplomacy, does not think so. According to two economists, Dushni Weerakoon and Sisira Jayasuriya, Sir Lanka’s repayment problems are not of China’s making.

Chinese loans account for only 10% of the country’s total foreign debt. Most Chinese loans are concessional with reasonably good terms, a fixed interest rate of 2%, other fees of 0.5% and average maturity dates of between 15 and 20 years. Though such terms are not as generous as those of Japanese loans, they are not outlandish either, according to the Sir Lankan economists.

Non-concessional loans make up the other 40% and they account for 20% of the total in that category.

The remaining 90% of Sri Lanka’s debt is owed to international financial institutions in the forms of sovereign bonds and foreign-currency-dominated loans. In 2007, the loans totaled US$700 million, but mushroomed to $15.3 billion by 2018.

The proceeds were largely applied in paying off old loans because economic growth stagnated or even declined because of a civil war and lack of measures to spur growth, dis-enabling the economy economy from generating sufficient revenues to repay loans.

As if that was not bad enough, Western or Japanese-owned or controlled financial institutions imposed the “Washington Consensus” loan conditionality, requiring borrowers to adopt austerity measures or refrain from deficit financing during periods of economic slowdown or recessions. According to Columbia University economist and Nobel laureate Joseph Stiglitz, that conditionality was meant to have borrowers repay loans first before spending on stimulus programs.

Insufficient revenues forced Sri Lanka to cut back spending, reducing the size of the public service and other expenditures, sliding further down the growth slope and increasing indebtedness. And on top of this, the weakening global economy caused Sri Lanka’s exports to fall, exacerbating its current-account deficits.

The Sir Lanka narrative can be applied to most if not all developing nations requiring loans from Western and Japanese financial institutions.

According to a BBC News report in November 5, 2018, Africa’s total external debt was $417 billion, of which China’s share was around 20%. In countries in which Western-controlled financial institutions did loan them money, the “Washington Consensus” loan conditionality was imposed. Underdeveloped nations such as Chad, for example, had to get another loan to pay off an existing one, for the same reason as Sri Lanka.

Source: Asia Times