The Debt-Trap Diplomacy Revisited

A Case Study on Sri Lanka’s Hambantota Port

Abstract

There is a strong case to reconsider the “debt-trap diplomacy” of China. The narrative that holds “Chinese loans are responsible for the debt-crises plaguing under developed and developing countries”(The Maritime Executive, 2019)needs a critical reexamination and, perhaps, a rethink in our geostrategic and geopolitical calculations. This paper is a case study on Sri Lanka’s Hambantota port, an asset handed over to China on lease for 99 years in the year 2017, which the dominant narrative claims to be a significant foreign policy debacle engineered by the Chinese. An inquiry into the crisis, however, traces its development back to the country’s fiscal management and macroeconomic realities that, the study argues, impelled Sri Lanka to take the tough call it did. Sri-Lanka is beset by twin deficits, among other macro-economic challenges, forcing its authorities to embark on external financing to meet fiscal expenditures, especially for the infrastructure projects. While the bulk of external capital comes from traditional creditors such as IMF and World Bank, the loan for the Hambantota project was sanctioned by China. Assessments from experts ruled out the economic potentiality of the project, owing to its commercial non-viability and logistical challenges. This decidedly prompted authorities to discontinue the project and the immediate consequence of which was difficulty in

revenue generation, translating into substantial constraints on the fiscal front resulting from the country’s soaring debt-servicing cost. Faced with a series of international sovereign debt-payment obligations lined up in the years 2020 and 2021, Sri Lanka finally gave up its non-productive asset in exchange for some extra foreign exchange reserves to meet the debt obligations lined up in the years ahead. Out of some 3000 infrastructure projects where China has invested in, the Hambantota port was the only one used as a textbook example for “the Debt-trap diplomacy.” However, drawing from objective analyses and empirical studies this case study finds no evidence for “Debt-trap diplomacy .”