China’s Belt and Road Initiative ‘debt trap’ narrative dispelled by US report, but reveals more Sri Lankan debt

China held 19.6 per cent of Sri Lanka’s US$37.6 billion external debt at the end of 2021, according to the according to the US-based China Africa Research Initiative

Citing the handover of Hambantota International Port to China, the report said the 99-year lease was a pivotal factor in creating the ‘Chinese debt trap’ narrative

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In 2017, Sri Lanka handed over Hambantota International Port to China on a 99-year lease in return for US$1.1 billion, stating that it would be difficult to pay back the loans taken to build the key piece of infrastructure. Photo: EPA

Published: 10:00am, 2 Dec 2022

A US report has moved to dispel the narrative of a so-called Chinese debt trap around Beijing’s signature Belt and Road Initiative despite confirming China holds more Sri Lankan debt than widely believed.

China held 19.6 per cent of Sri Lanka’s US$37.6 billion external debt at the end of 2021, higher than the often cited figure of 10-15 per cent, according to the China Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies.

Sri Lanka’s US$7.4 billion debt to China makes up 52 per cent of the island nation’s total bilateral debt, having all been reported to the World Bank, said the report, citing loan agreements and information received from the Sri Lankan government.

Including central bank currency swaps, including one from China that it can pay back in its own currency after three years, Sri Lanka’s total debt stands at US$40.6 billion, with 22 per cent owed to Chinese creditors.

At the end of the day, China also wants to get paid

Umesh Moramudali

“At the end of the day, China also wants to get paid,” said Umesh Moramudali, co-author of the report, which was based on archival research, information requests and informant interviews.

Sri Lanka was forced to declare a sovereign debt default in April as record low foreign exchange reserves left it struggling to pay for essential imports, including medicine, food and fuel.

The nation of 22 million is waiting on a US$2.9 billion bailout from the International Monetary Fund (IMF), although the United Nations’ finance agency is seeking assurances from creditors, including China, India and Japan, that the debts will be restructured.

Sri Lanka’s economic crisis had been years in the making, as it is highly dependent on external borrowings to finance consumption and infrastructure projects.