Our Debt to China5 min read

“The available statistics appear to show that, whether the phenomena are connected or not, the rise of prices has nearly been proportional to the increase of currency”[1]

J M Keynes on Indian Inflation

“Apart from the fluctuations of the seasons the Indian level of prices is most influenced at the present time by the extent to which Europe makes investments there”[2]

J M Keynes on Indian Inflation

Why China Invests?

Keynes wrote an economic journal article studying significant price rises in India in 1909. He statistically looked to see what figures best explain the rise in prices. His paper is difficult to summarise but easy to find online and read for oneself. It puts forth the argument that the ‘rapid influx of foreign capital’ is what caused the inflation of the studied time period.

China by running considerable trade surpluses has built up considerable foreign assets[i]. If China was to repatriate its foreign-held assets it would face severe inflation. It is widely agreed that these trade surpluses accrue due to a large working population being subject to slave-like conditions[ii]. This is a fact widely ignored by those Sri Lankans who purport to be considered with the welfare of labor but happily align themselves with China’s foreign interests.

Responding to Propaganda

Recently a very subtle PR campaign is being run pushing the idea that Sri Lankan debt to China is not significant[iii]. The argument put forth hinges on the rate of interest and the total holding of debt. Both of which would not place China as a predatory lender. This is in contrast to the deafening silence and lack of gratefulness to India which recently offered Sri Lanka a much-needed line of credit[iv].

            An actual think tank should look at the marginal growth in debt as there has been little historical down payment of debt. It is likely that within the Rajapaksa administration Chinese debt and investment would show exponential growth. People trying to politicize a front running scandal in a country wherein that has never been considered a crime must be ignored by the general public.

Providing a Sensible View

It is difficult to place a binary distinction between Chinese debt and investment being either good or bad. It, however, is dishonest to absolve China of the negative impacts some of its projects have had on Sri Lanka. The likening of China to a bank and its impact only modulating good or bad policy is overly simplistic and morally repulsive. As put forth in the bestseller Confessions of an Economic Hitman there is a massive role the lender plays in the success or failure of a project.

            One only has to look at Norocholai Power Station or the Hambantota port to see the negative impacts of Chinese investment. More on the Belt and Road initiative can be found on the American Enterprise Institute website. Their China Investment tracker documents broad corruption[v].

There have been positives of Chinese investment and China invariably has to be a source of finance to the government. China played a pivotal role in the war victory[vi]. Chinese labor is bringing significant efficiency to our construction sector. Every effort should be made to keep them in the country after the completion of the Shang Ri La project.

The Lie on Concessional Debt

The narrative put forth by these PR agencies is that Sri Lanka loses its concessional debt privileges around 2004. They suggest this is because Sri Lanka gains middle-income status during this period. Therefore after 2004, Sri Lanka has to go to international markets to finance its development[vii].

This narrative is maliciously untrue and is rarely contested. Sri Lanka on PPP terms might be middle income but is not so in terms of actual dollar income. This is why basic electronics seem so expensive even though we are defined as middle income. Electronics are imported and priced in actual dollar terms.

            Further concessionary debt or military aid is not driven by actual need but rather by foreign policy considerations. Israel, for instance, is a major recipient of US defense aid[viii]. As we near an election Sri Lanka is also receiving considerable US/NATO linked aid[ix]. This aid is not tied to any specific project and can be spent in conjunction with the upcoming monetary stimulus to boost the economy.

            The North and East of the country are also the focus of many good Samaritans[x]. The international community needs to promote projects in the area to seem sincere in their views at the UN. These projects, however, need to be free from corruption so as to meet the internal policy requirements of the funding agency and this was not possible in the previous regime.

Conclusion

We as civil society must look at things like grace periods and benchmark costs against international standards when assessing projects. Construction companies should also be able to make a profit. The Hambantota port, for instance, put the ports authority into a significant cash flow problem. The local partnership model put forth in the recent budget is an economic policy that is agreeable to the majority of the voting population.

Most Sri Lankans do not feel a major debt to China. The Chinese only help as they need to reinvest their foreign proceeds and gain regional influence in line with the interests of an emerging superpower. 

We, however, do have an obligation to wherever possible offer refuge to those who are politically persecuted. Sri Lanka is in a net debt position to the world who accepted its citizens when they were facing persecution domestically following two incredibly destructive changes to its constitution. We owe it to the world to give the Chinese freedom from communism. Port City can be their refuge.

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[i] https://www.forbes.com/sites/kenrapoza/2014/04/07/chinas-foreign-assets-more-than-half-its-gdp/#6c5b34d731ea

[ii] https://thediplomat.com/2018/03/chinas-forced-labor-problem/

[iii] https://www.veriteresearch.org/2019/01/16/chinese-debt-is-not-sri-lankas-biggest-problem-verite-research/

[iv] http://www.colombopage.com/archive_19A/Jan09_1547042503CH.php

[v] http://www.aei.org/china-global-investment-tracker/

[vi] https://www.japantimes.co.jp/opinion/2009/03/04/commentary/china-fuels-sri-lankan-war/#.XIZ7z9JS82w

[vii] http://www.ips.lk/talkingeconomics/2019/01/22/managing-sri-lanka-china-economic-relations-bri-debt-and-diplomacy/

[viii] https://www.theatlantic.com/international/archive/2016/09/united-states-israel-memorandum-of-understanding-military-aid/500192/

[ix] http://www.dailynews.lk/2019/03/18/business/180538/world-bank-provide-usd-70-mn-rural-development

[x] https://reliefweb.int/report/sri-lanka/human-rights-must-be-top-priority-economic-reforms-says-un-expert