The Chinese regime’s investments in and loans to Sri Lanka have turned the island nation into a modern-day semi-colony, placing the future of its economy in the hands of Beijing’s state-owned contractors and bankers and the International Monetary Fund.
Sri Lanka’s close relations with the Chinese regime, which brought the country into this dire situation, began in 2007, when Beijing provided President Mahinda Rajapaksa with military and diplomatic assistance to fight the Tamil Tigers. Over time, the two countries have become closer thanks to high-profile Chinese investments in Sri Lanka’s construction projects, including the deep-sea Hambantota port project, the Colombo Port City complex, and the Mattala Rajapaksa International Airport.
In theory, building infrastructure is something that developing countries such as Sri Lanka need to do to develop a market economy, stimulate economic growth, and become a regional trade hub.
However, that is not how the Chinese regime’s infrastructure investments in the small island nation have worked in practice.
There is a good explanation for this pattern. All three major infrastructure projects were pursued with political rather than economic criteria. All three served Beijing’s interests in expanding its presence in the Indian Ocean and encircling India rather than the interests of the local economy.
As a result, Chinese investments have failed to stimulate economic growth with sustainable infrastructure projects.
Some projects are not economically viable, as they don’t serve a large enough market to justify the resources allocated to them, such as the airport. As a result, they end up wasting the country’s precious resources.
Other projects are economically viable but built at excessively high costs by Chinese state construction firms instead of by private contractors through transparent, competitive bidding.
In addition, Chinese investments have turned into debt traps, as they were financed by loans from Chinese state-owned banks at high interest rates and without transparency, leaving Sri Lanka heavily indebted to Beijing.
Sri Lanka’s government debt stood at 103 percent of GDP in 2023, with a growing portion owed to China. In addition, Sri Lanka’s government budget deficits are running at 10.51 percent of its GDP, adding to its indebtedness.
The country’s debt began to increase at a time when Sri Lanka was already living beyond its means, as evidenced by persistent account deficits.
To cope with rising debt to Beijing, Sri Lanka has signed agreements with the Chinese regime that swap loans for equity. As a result, the regime now owns significant infrastructure projects, such as Sri Lanka’s principal port, a key outpost in the Indian Ocean for Beijing.
Still, these agreements weren’t enough to save the country from seeking debt relief from the International Monetary Fund (IMF).
In March 2023, the Washington-based institution—notorious for its stringent loan terms and conditions—cleared a $2.9 billion loan to ease its balance-of-payments crisis. This crisis made importing essential products such as food, fuel, and medicine difficult, causing social unrest.
But the loan came with strings attached, such as the ability to dictate the future course of the country’s economic policy.
The Chinese regime’s investments are supposed to help Sri Lanka grow and develop. Instead, they have pushed the Sri Lankan economy into a perfect storm, putting it in a position no country wants to be in: dependent on the IMF and Beijing for its survival.
