News
In donor loans Sri Lanka trusts, in life and in debt
Genuine concerns have emerged in Sri Lanka over the national debt and China’s infrastructure undertakings by state entities that have a multitude of subsidiaries and which are bankrolled by Beijing’s state banks such as the Export-Import Bank of China. The Eximbank comes under the State Council, the apex arm of Beijing’s state power.
Sri Lankans fear mounting debt obligations will crimp public spending on things such as social services, health and education. They worry about not receiving their pensions.
Colombo’s eagerness to accept Beijing’s credit card (US$ 4.1 billion in loans and grants from 2009-2013) became necessary for national recovery and development priorities as the war against Tamil terrorism ended. Traditional donors such as the European Union and the United States were out of step with the executive’s socio-economic and development policy outlined in two documents.
Foreign aid was needed to support development in the form of hardware such as expressways, railways, ports, airports, power plants, and island-sized cities rising from the ocean. Chinese companies (see separate brief profiles), some of which are publicly traded in the Hong Kong Stock Exchange, were contracted to deliver. Just two years after the war, loans from China, Japan, Asian Development Bank and World Bank amounted to US$ 1.75 billion, Ministry of Finance data show. China’s share was US$ 784.7m of loans through Bank of China, China Development Bank, and Industrial and Commercial Bank of China.
By 2011, Colombo’s external debt including loans and bond issues had risen by 13 per cent to US$ 18.6b. US$ 987.5m went into servicing the debt. Last year, external debt climbed to US$ 18.9b and US$ 1.15b went to debt servicing.
In the five years to 2011, China’s commitments added up to US$ 2.12b, of which US$ 1.2b was disbursed, government figures show. Last year, too, China was the leading lender, handing out US$ 517m out of a total US$ 2.3b in loans from various development partners. The ADB and Japan ranked second and third. In contrast, the US gave US$ 64.9m. In that year, project loans amounted to US$ 1.8b.
Despite China’s lending reaching US$ 4.1b in the five years to 2013, Sri Lankans may take heart from the late foreign minister Lakshman Kadirgamar’s comments in Beijing in December 28, 2004, that China “has never sought to influence the domestic politics of Sri Lanka. Over the years China has proved to be benign and sincere with no ulterior motives for befriending Sri Lanka.” And he insisted: “Sri Lanka has never been financially dependent on China.”
He also recalled how the late Prime Minister Sirima Bandaranaike floated an initiative which paved the way for a ceasefire following the Sino-India border war in October 1962.
Amid the necessity to borrow, not just Beijing’s loans, but debt capital markets also became a channel for raising ever more debt for an economy in a hurry and which has enjoyed growth rates (7.3 per cent in 2013), not even seen in developed economies.
Achieving the status of a middle-income country became an impediment to concessionary loans. Bilateral development aid shrank. In this backdrop an old friend became even more engaged in development without demanding structural reforms that Colombo is used to hearing from the much-maligned World Bank and IMF.
Yet, whatever the terms, taking on more loans from Beijing, the world’s biggest exporter of foreign capital, is appearing to be a burden to bear. Compared with China, where in two stock exchanges 2,500 companies are traded and whose foreign trade was worth US$ 4 trillion (exports US$ 2.21 trillion; imports US$ 1.95 trillion) last year, Sri Lanka’s small economy is underpinned by its biggest export, not apparel, not tea, not gems, not tourism, but millions of jobless, indebted, unskilled women and men.
About 250,000 leave every year helping to keep the national jobless rate low. Their foreign exchange earnings of US$ 6.4 billion accounted for 9.5 per cent of GDP last year, Central Bank data show. They also ease the burden on the balance of payments, a record of financial outflows and inflows.
Even by 2020, the Central Bank predicts that remittances will swell to US$10b compared with tourism earnings of US$6b. By 2020, textiles and garments exports are forecast to contribute US$8b, well below remittances.
It is not just Colombo that is spending on Beijing’s credit card. China, the holder of the world’s biggest pile of foreign reserves, is a much bigger creditor to the world’s leading economy, the United States, which has a massive hunger for foreign capital, just like Sri Lanka, to bridge the budget gap.
Beijing holds US$ 1.27 trillion of American public debt, but also has hit out at US monetary policy. In an editorial in July, 2011, Xinhua News Agency lambasted Washington to “live within one’s means”.
The debt purchases by the People’s Bank of China have drawn the ire of lawmakers who have warned about the risks to the US economy and its interests. It even became a concern for Beijing when in August 2011, the US long-term sovereign credit rating was downgraded from triple A to AA + by Standard and Poor’s. US lawmakers including the Treasury Secretary have also attacked China for manipulating its currency, the yuan to make exports cheaper. China does not hold back either. In 2011, Xinhua condemned America’s “runaway debt addiction” and its “tarnished credibility”. Unlike Colombo, which wrestles with debt obligations, continuing fiscal deficits since independence, and shrinking government revenues, Washington can settle its dues on time. Sri Lanka’s indebtedness is high relative to its economic output. The debt to GDP ratio last year was 78.3 per cent compared with 86.2 per cent in 2009.
Sri Lanka had outflows of US$ 740.6m for foreign debt service payments and payments of US$ 351m for IMF non-concessional loans under stand-by arrangements, Central Bank reports show. Long-term loans up to June this year totalled US$ 962m compared with US$ 951m during the comparable period of 2013, the bank says. It is such data that cause consternation among hard working migrant workers who send their forex earnings home, and smart, proud, Sri Lankans who hope their future is secure, regardless of who the biggest creditor is.
| China Merchants Holdings (International) Company- Owned by the Chinese government - China’s leading ports operator and investor. Builder and owner of Colombo International Container Terminals, which began operations in July last year. Holds 85 percent stake in the terminals - Colombo International Container Terminals was its first greenfield project with management rights; entered into the project with Aitken Spence and Sri Lanka Ports Authority in 2011 but later Aitken Spence exited the deal. China Merchants held 55 percent of CICT, Aitken Spence 30 percent and SLPA 15 percent. China Merchants acquired the 30 percent stake held by Aitken Spence for US$5.5million in January 2012, raising its stake to 85 percent. - Operates 34 subsidiaries - Listed in Hong Kong. Stock code 0144 - Profits for the six months ended 30 June 2014: HK$2.14 billion, up 11 percent - Revenue HK$21.77b in the first half (HK$10.2b from ports) - In the first half, the group’s ports in China handled 28.53 million containers - Will operate the Colombo South Container Terminal for 35 years - On Sept 16, Signed framework agreement to develop International Maritime Centre - On Sept 16, Sri Lanka Ports Authority, inked an agreement with China Merchants Holdings International and China Harbour Engineering Company to set up a project company to operate the container terminal in phase II of the Hambantota Port for 35 years. The joint venture and SLPA will invest US$601m. The joint venture will hold a controlling stake of 64.98 percent following a US$391m investment into the project company. Source: Company filings/others China Communications Construction Company - Owned by the Chinese government; involved mainly in infrastructure construction and design (ports, roads, railways, bridges), dredging, manufacturing of heavy machinery (such as port machinery) and investing overseas China Machinery Engineering Corp - Owned by the Chinese government |