Not China's debt trap

"Sri Lanka's debt problem isn't made in China", published 28 February by East Asia Forum, refutes the story cited by media and experts that "Sri Lanka was forced to cede a strategically important port to China after being lured into a debt trap by easy Chinese loans". Authors Dushni Weerakoon, of the Institute of Policy Studies Sri Lanka, and Sisira Jayasuriya, from Melbourne's Monash University, establish that this line, which is used to tar China's Belt and Road Initiative (BRI), is "based more on fiction than fact".

Sri Lanka indeed faces a debt crisis, but it has "very little to do with Chinese loans", says the piece. Borrowings from China comprise around 10 per cent of Sri Lanka's total foreign debt. More than 60 per cent of the debt to China was borrowed on concessional terms, comprising low-interest, long-term loans (usually at a fixed interest rate of around 2 per cent, 0.5 per cent fees and 15- 20 years to maturity). The rest—non-concessionary Chinese loans—are but one-fifth of Sri Lanka's non-concessionary borrowings. The other four-fifths is the real cause for concern; it "was borrowed from international capital markets in the form of sovereign bonds, term financing facilities and foreign holdings of gilt-edged securities". Sri Lanka accrued US$15.3 billion of debt from the free market in 2007-18, from issuance of international sovereign bonds and foreign currency term financing facilities.

"Sri Lanka's turn to international commercial borrowings in the past decade was part of a global phenomenon", wrote the authors. "Global economic conditions in the aftermath of the 2007-08 financial crisis depressed export prospects for emerging market economies. But they also provided an unexpected opportunity for ‘cheap' borrowing in global capital markets as low yields in developed countries led to a scramble for higher returns by investors."

Thus was Sri Lanka trapped by the perils of the competitively driven, market system. Caught in a vicious cycle, and "unable to implement policies to attract non-debt creating capital flows, enhance productivity and achieve sustained growth"—not exactly the forté of international debt markets—the country was forced to continue taking on debt. "Leasing the Hambantota Port was part of a strategy to find cash and stave off pressures on the available fund of reserves", wrote Weerakoon and Jayasuriya. The claim about a Chinese debt trap in Sri Lanka has "more to do with global politics than the real facts of the Sri Lankan case", they conclude.

In the case of the Philippines, Johns Hopkins University PhD student Alvin Camba spells out in "Examining Belt and Road ‘debt trap' controversies in the Philippines", that when "considering the danger of a debt trap, it is important to analyse the particular factors at play within the host state". If a country's GDP is encouraged to grow as a result of debt, there is no debt trap; quite the opposite.

"In the case of the Philippines, the country possesses economic fundamentals that mitigate against the danger of excessive indebtedness. Between 1999 and 2014, Philippine debt increased from US$51 to US$77 billion. However, at the same time, the country's external debt to GDP ratio (in percentage) decreased from 61.6 per cent to 27.3 per cent. The total amount of the country's annual debt service during those years ranged from US$6.5 to US$7.5 billion, but the percentage of debt service decreased from 14.6 to 6.2 per cent, indicating that less of the country's GDP has been used for servicing debt."

Many reports on the Philippines "ignore the varying conditions of Chinese financial aid and loans—assuming high interest rates for all loans ... to estimate a ballooning total debt obligation. Moreover, they also ignore the likelihood that projects that generate internal demand could successfully contribute to economic growth." Camba points to the rise in overall productivity created by the two rail lines being constructed by China in Luzon, for instance. He also notes that China is not the only investor in Philippine infrastructure, but that "more than half of developmental infrastructure projects in the country are funded by the Japanese International Corporation Agency and the Asian Development Bank". The diversity of lenders makes a debt trap less likely. Camba also contends that the Philippines has high financial and technical standards when it comes to selecting development projects. "[A]s long as the Philippines maintains public scrutiny and multi-sectoral vetting of such infrastructure projects throughout their entire life-cycle, the country faces strong prospects for maintaining its financial solvency and national sovereignty", Camba concludes.