China and Sri Lanka Part Two
by Michael Patrick O'Leary
This article appeared in Ceylon Today on Thursday February 16 2017
On April 21-27, 1996, President Kumaratunga made a state visit to China at the invitation of then Chinese President Jiang Zeming. Two agreements were signed to enhance economic cooperation. On August 30 2005, Kumaratunga began a five-day state visit to China at the invitation of then Chinese President Hu Jintao. The two countries signed eight agreements on cultural, economic, financial and tourism cooperation. However, she turned away from China (accounting for only 18%) as a supplier of weapons for the war against the LTTE.
CBK’s recent statements on China aroused the wrath of Dayan Jayatilleka (former Sri Lankan ambassador to Geneva, Paris and UNESCO) for her “shameful description of the Nelum Pokuna as a “commode” (“kakkussi pochchiya”). The building was a gift from China and modelled on the magnificent Lotus Pond of King Parakramabahu’s Polonnaruwa. A greater contrast with the conduct of Madam Sirimavo Bandaranaike, who never forgot China’s generosity in gifting the BMICH, cannot be imagined”.
Harim Pieris, a former advisor of Kumaratunga recently recommended that Sri Lanka be to India as Hong Kong is to China, overlooking the fact that Hong Kong is a part of, and belongs to China while Sri Lanka does not belong to India.
War and Reconstruction
During the war against the LTTE, Sri Lanka’s traditional arms suppliers imposed restrictions. GOSL had to look elsewhere and China was willing to help. The Chinese arms supplier, Norinco, maintained a weapons dump in Colombo.
Following the defeat of the LTTE, the Rajapaksa regime chose to focus on rapid economic revival and development of infrastructure. Most western countries wanted accountability and reconciliation addressed first and imposed conditions on whatever financial assistance they might provide. The US reneged on its commitment to provide $500 million from the Millennium Development Account for road development. There was reluctance among the major Western countries resisted Sri Lanka’s approach to the IMF for a standby loan of $1.5 billion.
GOSL turned to the source that most Western countries themselves, including the US and the EU, rely on for funding. China was not bothered by fripperies like human rights and won contracts for substantial post-war development projects in Sri Lanka’s North and South with ongoing and projects concluded estimated at more than US$ 6.1 billion. The Rajapaksa Doctrine – give the North to India to develop and give the South to China – backfired because India felt slighted that Sri Lanka was giving more projects to China because Chinese companies were bringing the funds.
Critics saw Sri Lanka being in danger of becoming a Chinese colony and India was alarmed at China’s military presence in the island. India insisted on opening a consulate in Hambantota, an area which rarely sees an Indian citizen. The suspicion was that the consulate’s real purpose was to spy on the Chinese. Western governments punished Rajapaksa for his alliance with China. The first phase of the Hambantota Port project was inaugurated on August 15 2010. On the same day, the EU rescinded Sri Lanka’s GSP plus facility.
Rajapaksa is today critical of the current government’s subservience to China. He contends that by giving 80 percent stake in Hambantota port to a state-owned Chinese company, and making the deal valid for 99 years, the Sirisena-Wickremesinghe regime has handed over a huge national economic and strategic asset to a foreign company.
Sri Lanka has been trading with China for centuries and China is still an important partner. However, there is a trade imbalance. Sri Lankan exports to China are worth less than USD$ million – coconut coir, rubber, tea, apparel, and gems and jewellery while Sri Lankan imports from China now exceed USD$ 3 billion – machinery, fabrics, apparel accessories, cotton and fertilizer. China was Sri Lanka’s third largest trading partner in 2012, accounting for 17.1% of Sri Lankan imports (the second largest import source after India, which accounts for 19%. Exports to China amounted to 2.3% of Sri Lankan overall exports, making it the fifth largest export destination after the US, the EU, India and Russia. In May 2013, Sri Lanka proposed an FTA, to which China agreed. Sri Lanka does more trade with India than China but India is not happy about cheap Chinese consumer durables undermining its own markets.
Currently Sri Lanka is $8 billion in debt to China. The Rajapaksa government argued that it needed to get on with infrastructure development without delay and the Chinese were prepared to step up and help quickly without conditions. Donor agencies such as the World Bank and the Asian Development Bank provide soft loans at interest rates ranging from 0.25 %, 2% or 3%. However, these agencies stipulated strict conditions and made irritating demands about human rights. The Rajapaksa government argued that long term borrowing from China at interest rates ranging from 2-3% and 6-7% was the only option available to implement post-war development projects. Total estimated construction cost of Phase 1 of the Hambantota Port project was US $361 million, 85% of which was funded by the Exim Bank of China.
Finance Ministry sources during the Rajapaksa years claimed that financial help provided by China fell into three categories: free cash, interest-free loans and concessionary loans. The first two came from China’s state finances while concessionary loans are provided by the Export-Import Bank of China (Exim Bank). Sri Lanka received several soft loans from China at an interest rate of 2-3% with maturity terms of 20 years, with five years expandable on condition, and 2-5 years grace period. The total now owing suggests that most Chinese help did not come in the form of outright grants but as loans at commercial rates from China’s Exim Bank. Rajapaksa’s Deputy Economic Development Minister Lakshman Yapa Abeywardena said, “While the HSBC, for example, was offering loans with 9% interest rates, China has been offering loans for very low rates, such as 1% or even 0.5%”.
Governments that succeed the Rajapaksa regime will be saddled with these debts. In defence of the regime’s borrowing strategy one should look at the experience of Argentina. China has never pushed a debtor to bankruptcy but those who relied on commercial borrowings from the West, such as Argentina, have had a different experience. Sri Lanka has had a good record of meeting its obligations to its creditors.
RW and China
The Prime Minister, Ranil Wickremesinghe, tried to undo the damage done to Sri Lanka/China relations during the election campaigns of 2015. The effort to oust Mahinda Rajapaksa seemed to require criticism of all the projects he had undertaken. The accusation that these projects were grandiose follies involving massive corruption also entailed painting the Chinese government as corrupt and with dishonourable intentions towards Sri Lanka. The opposition to Rajapaksa described the Hambantota Port as a future Chinese naval base intended to contribute to the PRC’s string of pearls geostrategy to achieve regional hegemony over India. Mattala Airport was, they accused, built with Chinese aid as a future Chinese military air base.
Once in power, the Wickremasinghe/Sirisena government had to pay out for some of the promises they had given to the electorate and this made the country’s financial situation worse. Inevitably they had to grovel to China. During his April visit to China, the prime minister reiterated Sri Lanka’s endorsement of Beijing’s Maritime Silk Road strategy. He issued a statement saying: “Projects such as the Hambantota Port and the Puttalam Coal Power Plant Project have become icons for the two countries’ cooperation in infrastructure construction”. Mahinda Rajapaksa was quoted as saying that he stood vindicated by the Government’s recent actions.