Sri Lanka is currently going through the worst economic downturn faced since independence from Britain in 1948. Facing power outages, lack of food, bankruptcy, and overwhelmed by numerous loans, the island nation is struggling. However, it hasn’t always been this way.
In the 19th and 20th centuries, Sri Lanka became a plantation economy famous for it’s cinnamon, rubber, and Ceylon tea, something that remains a trademark national export. The development of ports under British rule strengthened the island and made it a center of trade. It’s major economic sectors are tourism, tea export, clothing, rice production, other agricultural products, and overseas employment, especially in the Middle East. From 2005-2011, Sri Lanka’s per capita income doubled.
However, in 2016, it’s debt started to accumulate as infrastructure started to develop. This led to a near state of bankruptcy. In the fourth quarter of 2016, there was an estimated debt of $64.9 billion. In 2018, China agreed to bail out the country with a loan of $1.25 billion to deal with foreign debt repayment spikes in 2019-2021. In September of 2021, Sri Lanka declared a major economical crisis. But how exactly did Sri Lanka fall into debt? How did such a thriving economy crash? There are three main factors that caused this. Infrastructure, COVID, and the previous ban of chemical fertilizers.
Toruism and overseas employment, both of which provided the country with an input of foreign currency, crashed due to the pandemic. People stopped traveling, during this period, and people were also losing jobs. Prior to the pandemic, the country had proudly achieved upper-middle-income status, yet today half a million people have sunk back into poverty.Apart from that, there was also a ban on fertilizers put in place, partly to save foreign exchange. However, this led to domestic rice production falling 20% in the first six months. As a result, they were forced to import $450 million worth of rice. The ban also devastates the nation’s tea crop, the primary export and source of foreign exchange. Although the policy has been suspended and the government is offering $200 million to farmers as direct compensation, it hardly makes up for the damage and suffering the ban produced.
Today, they now heavily rely on imports from other countries. “Soaring inflation and a rapidly depreciating currency have forced Sri Lankans to cut down on food and fuel purchases as prices surge.” (foreign policy.com) This has led to power cuts lasting up to 13 hours a day. The Rajapaksa government also promised tax cuts, which were enacted before the pandemic. With less money from the taxes, the government was unable to make some of these necessary purchases.
Sri Lanka has also fallen into debt due to loans from other countries. One of them is China. Sri Lanka, situated between the key shipping route between the Malacca Straits and the Suez Canal, which links Asia and Europe. However, the only major port in Sri Lanka is the Port of Colombo, and it is catered towards container handling and is unable to provide facilities for port related industries and services. Therefore, a new port near the city of Hambantota, which has a natural harbor and is close to international shipping routes, was proposed. With the help of the Chinese government and workers, this port was built.
This relates to China’s Belt and Road Initiative; a global infrastructure development strategy developed by the Chinese government to invest in nearly 70 countries and international organizations. It’s about improving the physical infrastructure through land corridors that roughly equate to the old Silk Road. This also includes a maritime Silk Road along ports. Hambantota was built with Chinese investment to become part of this. “But the billion dollar project using loans and contractors from China became mired in controversy, and struggled to prove viable, leaving Sri Lanka saddled with growing debts.” (bbc.com) In 2017, Sri Lanka agreed to give “state-owned China Merchants a controlling 70% stake in the export on a 99-year lease in return for further Chinese investment.” So basically, using a loan from China, Sri Lanka is paying Chinese workers to build this port, causing the money to go directly back to China itself. So they’ve pretty much fallen in what is called a ‘debt-trap.’ This has been seen in other parts of the world, where, “Chinese lending has also proved controversial, with contracts whose terms could give China leverage over important assets”, can be seen. Some examples include:
- Pakistan
- Ethiopia
- Djibouti
- Mongolia
- Sri Lanka
Many more included. (These are countries listed part of the Belt and Road Initiative, and are in debt. Not all countries part of the Initiative essentially owe debt.) But what China does, is step in, offer some assistance through money/loans to solve a problem a country has. This is mainly related to large infrastructure projects like roads, railways, ports, and also the mining and energy industry. As of right now, there are more than 40 countries in this category whose debt exposure to Chinese leaders is more than 10% the size of their annual economic GDP.
Apart from that, it’s interesting how this works. There’s not really any international law that says China cannot do something like this. There are laws for it being domestic, but not internationally. We have loan sharks domestically, and just foreign/international debt.
Overall, I think that Sri Lanka made the mistake of doing something they couldn’t afford. At that time, during the agreement of building the port, Sri Lanka was already in debt. This was a huge risk they had to take. If it didn’t prove to be viable, as it didn’t, Sri Lanka ended up being in more debt. They shouldn’t have done something they weren’t sure about and weren’t stable to proceed with. Although China was helping them pay off some debt they had at that time, by doing so, they got themselves into a more deeper problem. Not only that, I think that the government was taking really hasty decisions just for the sake of getting money and trying to get out of the problem. This whole Hambantota port project was thought of for decades, but only now put in because China was offering to invest in it to pay off debts. I feel like they should have started this project much before instead of when they had a problem. I can’t really say much regarding the pandemic, as that was something no one could have expected. However, I think that at that time, when rice-production and other agricultural products were still going strong within exports, the government shouldn’t have done anything about it. Maybe waited until later to put in tax cuts and the chemical fertilizer ban. Wait until the country was able to pull itself out instead of doing it quickly. So pretty much, don’t do something you can’t afford to do.
