The warning signals of the total economic and political collapse in Sri Lanka could not be clearer for other emerging market and low-income countries in Africa, Asia, and Latin America that are heavily debt-ridden, with China as their biggest creditor.
The irony is not lost that Sri Lanka, a country of 22 million, was until recently considered a thriving upper-middle-income country.
How did this tragedy happen? By economic mismanagement, corruption, and nepotism by successive governments, combined with unanticipated adversities such as COVID and the Ukraine war.
The recent popular uprising led to the resignation of Prime Minister Mahainda Rajapaksa and, subsequently, his brother, President Gotabaya Rajapaksa, to flee the country. On July 21 the Parliament elected a new president, Ranil Wickremsinghe, who previously served several times as prime minister.
Sri Lanka defaulted in May on over $50 billion in external debt, 10% of which is owed to its single biggest lender, China. Sri Lanka is suffering over 50% inflation, twin deficits (budget and current account), foreign exchange reserves that are almost empty, and an inability to import even necessities. With no fuel and gas, no jobs, and short on food and medical supplies, mass demonstrations erupted, and enraged masses burned the ancestral Rajapaksa family home and took over the presidential palace.
I spoke with a keen observer of the Sri Lanka scene, Lakshman Guruswamy, an emeritus law professor at the University of Colorado, who recommends early elections as the current president is unpopular because of his close association with the Rajapaksas, and an all-party government will be better able to undertake the necessary economic reforms.
The Rajapaksa dynasty ruled the country for 15 years and spent lavishly on “vanity projects.” These include a convention hall for 1,500 people, a cricket stadium seating 35,000, and a huge international airport, as reported by the Financial Times. Add to these a costly port facility in the Rajapaksas’ hometown, now ceded to China after the government found itself unable to pay back the loan, and a 350-meter tower in the capital, Colombo, considered a “white elephant” by protesters and a symbol of China’s belt and road initiative, resulting in mounting debts.
Next came tax cuts and a ban on imported chemical fertilizers to protect foreign exchange reserves, which severely curtailed tea production and export, along with reduced food production because homemade and organic fertilizers did not work. External shocks included the 2019 Easter bombing and COVID outbreaks, which led to a tourism decline. Then came Russia’s war in Ukraine and shortages of grain. Although India stepped up with over $3 billion in assistance for food, fuel, and medicine credits to Sri Lanka, it was not sufficient.
Critics have put the blame for this calamity on China’s “debt trap” diplomacy. And that criticism is not confined to Sri Lanka or another Asian country, Laos which is also overburdened with Chinese indebtedness. It also includes several African countries that are suffering from the same malady.
A case in point is Zambia, which defaulted on its foreign debt of more than $14 billion in 2020. The country’s debt to China (its biggest creditor) totals more than $6 billion. After dithering for years China has, for the first time, joined other creditors under the G-20-Paris Club Common Framework for Debt Treatments as creditors’ committee co-chair, and the deal is expected to be announced in a week.
Until now, China has always negotiated with its borrowers bilaterally and often in secret. This arrangement will open the door for the International Monetary Fund (IMF) to provide a $1.4 billion bailout loan to Zambia, for the IMF has sought assurances from other creditors on debt relief.
President Hakainde Hichilema, who succeeded Zambia’s spendthrift Edgar Lungu last August, is also assuring the IMF that his country remains committed to repayments and to undertaking economic reforms. Other African countries that are also heavily indebted to China are watching with anticipation that restructuring will take place for them, as well.
Trip Mackintosh, a former partner at a major Denver law firm who spends considerable time in Africa and just returned from Zambia, told me, “’Soft’ loans from China fueled corruption and a ‘mirage’ economy in Zambia, as they have throughout the continent. Apart from the false economic growth that the money has produced, Chinese lending has deepened the ubiquitous corruption, leaving a lasting and dangerous problem.”
Ved Nanda is Distinguished University Professor and director of the Ved Nanda Center for International Law at the University of Denver Sturm College of Law. His column appears the last Sunday of each month and he welcomes comments at vnanda@law.du.edu.
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