The strategy of debt

With Sri Lanka Ports Authority agreeing to sell a 70% stake in the Hambantota port to China Merchants Port Holdings last month, Sri Lanka finally concluded its $1.12 bn agreement with the state-run Chinese firm to operate the port in the southeast of the country.

The government gave its consent almost six months after the framework agreement was signed as the deal got bogged down in local protests. Now, the stage is set for China Merchants Port Holdings to run the workings of the newly constructed port over a 99-year lease period.

For China, the Hambantota port has long been a strategic priority given its Maritime Silk Road ambitions, and Beijing has been quite active in trying to salvage this deal. Sri Lanka is located on the critical sea route for oil shipments travelling from the West Asia, making energy security an important reason for China to invest in the island nation. It has been suggested by the Chinese firm that “with these maritime infra-structure investments, and other diverse investments such as the proposed international maritime centre, Sri Lanka will be well positioned to play a strategic role in the one-belt-one-road initiative of China.”

For Colombo, however, the project has turned into a nightmare since its opening in 2010. Sri Lankan Ports Minister Mahinda Samarasinghe had made it clear that Sri Lanka “cannot afford to continue to pay” back the loans without better returns at the port. The Sirisena government has blamed the debt on former president Mahinda Rajapaksa, whose government was keen to give the project to Beijing.

The Export-Import Bank of China had provided a large chunk of more than $361 million in construction financing. With the signing of the final pact, the Sri Lankan government is confident that it would be able to repay the loans with $1.12 billion, even as the Chinese firm is expected to invest an additional $600 million to make Hambantota port operational.

There have been local protests for months now against what the local opposition viewed as a plan to take over a private land for an industrial zone in which China will have a major stake, and control over the port. Reservations have also been expressed by the opposition parties, with some demanding that the agreement not be signed till it is debated in the Lankan parliament.

After the Sirisena government came to power in 2015, it was quite vocal in its desire to reduce Sri Lanka’s reliance on China, but financial pressures became too hard to ignore. With the island nation’s total debt standing at $64bn, almost 95% of all government revenues go towards debt repayment. China presented itself as an easier lender of last resort.

India, along with other states like the US and Japan, had also raised the issue of security with Colombo. Sri Lanka has assured India that there are no security issues involved in the port deal, which it says will only be used for commercial purposes.

According to the Sri Lankan government, “no naval ship, including Chinese vessels, can call at the Hambantota Port without our (Colombo’s) permission.” The revised deal with China provides for the formation of two companies to split the operations of the port in which China will run the company that will be in charge of business while Sri Lanka will have a major stake in the firm dealing with security. This is an attempt to allay Indian concerns.

Sri Lanka has been sensitive to Indian security concerns vis-a-vis China’s presence in the Indian Ocean in recent years. The Sirisena government and the Modi government have engaged each other substantively. Whereas in 2014 China docked its submarines at Hambantota, much to India’s annoyance, earlier this year in May, Colombo refused to allow China to dock a submarine at Colombo port.

On a conquest

Sri Lanka’s case is a text-book example of Beijing’s modus operandi in pursuing China’s strategic interests. Other countries doing business with China are also facing similar situations. Cambodia’s external multilateral public debt, for example, now stands at $1.6 billion, while its bilateral public debt with China is $3.9 billion. And 80% of this is owned by the Chinese state. China has emerged as Cambodia’s largest military and economic partner, having disbursed about $3 billion in concessional loans and grants to Cambodia since 1992.

Questions are also being raised in Malaysia about Chinese investments and their future. The China-Pakistan Economic Corridor is posing similar dilemmas for Pakistan, with many in the country raising concerns about the economic viability of the project and fearing that Pakistan will end up becoming a colony of China. But given Pakistan’s economic health, it’s unlikely that these voices will be heeded.

Using its own brand of “debt trap diplomacy,” China is now forcing smaller states to abide by its dictates. This will have pernicious consequences for these states and is likely to bounce back on China. But for India, China’s growing presence around its periphery will continue to pose challenges if New Delhi does not get its own act together.

Blaming Beijing is the easy option. Getting ready to challenge China’s profile by enhancing our own regional role as an economic and security actor is the need of the hour for India. At a time when China is strangling India in the north with its attempts to change facts on the ground, it is imperative for India to strategically think of using the maritime sphere to break Beijing’s growing dominance in its periphery.

(The writer is a Distinguished Fellow at Observer Research Foundation, New Delhi, and Professor of International Relations, King’s College London)