APD | Does Hambanthota port deal turn in to dispute between Sri Lanka and China?

By APD writer Ajith D Perera

***Editor's note: *the author is a management and marketing consultant who has over 20 years work exposure in Sri Lanka, UK, UAE and Bangladesh. He had been a visiting lecturer at Institute of Personal Management (Sri Lanka) and Emirates College of Technology (UAE). The article reflects the author's opinions, and not necessarily the views of APD.

History of Sri Lanka-China relationship

Historical ties between Sri Lanka and Chinadates back to the 4th century marked by the visit of Chinese Buddhist monk and explorer – Faxian and later by the Chinese warriorAdmiral Zheng of Ming Dynasty in 1405.

Sri Lanka is one of the first non-communist countries to recognize the People’s Republic of China, which inked trade deals with China in January 1952 even before diplomatic relations was established between the two countries. Sri Lanka also supported China’s accession to the United Nations and the World Trade Organization, and co-sponsored the draft resolution to facilitate China’s admission to the UN Security Council in 1971.

Sri Lanka and China gradually developed closer economic and military cooperation in past few decades. China’s support during the Sri Lankan governments’ war against terrorism was a crucial factor in military operations.

In April 2005, then Chinese Premier Wen Jiabao’s visitto Sri Lanka upgraded bilateral cooperation to ahigher level and both countries agreedto establishtheall-round cooperation partnership of sincere mutual support and ever-lasting friendship. In May 2013, during Sri Lanka’s President Rajapaksa’s visit to China, both sides decided to upgrade the relationship to the strategic cooperative partnership of sincere mutual support and ever-lasting Friendship. Chinese President Xi Jinping visited Sri Lanka in 2014.

China’s support for infrastructure development in Sri Lanka

China has funded Sri Lankan development projects by providing loans,mostly at the concessionary rate of interest except for couple of loans grated at commercial rate and grants. These projects are in to roads, airports, harbors, power,irrigation, telecommunication, health and specialized projects like Colombo International Financial City.The total borrowing from China is around USD 10 bln as of 2018.

Sri Lanka’s debt obligations to China and the world

Sri Lanka's External Debt reached 55.5 USD bln in Jun 2019. However, Chinese loans comprise about 12 percent of Sri Lanka’s total foreign debt only, making it the third largest recipient of Chinese funds under the Belt and Road Initiative countries after Pakistan and Russia. Out of this debt only 40 percent was lent to Sri Lanka at non- concessionary rate and it comprises only 20 percent of Sri Lanka’s total debt from such high interest sources. Sixty percent of the Chinese loans granted from 2001 to 2018 to Sri Lanka including two-thirds of the Hambantota port loans were at 2 percent interests, and mostly repayable over 20 years.

The Hambantota port lease, held jointly by the Hong Kong-based China Merchants Port holdings and the Sri Lanka Ports Authority, was negotiated between 2016 and 2017. Payments of the principal and interests for the port loans comprised only about 1.5 percent of Sri Lanka’s external debt repayment obligations due then. The Sri Lanka Ports Authority paid on time, using revenues from the Colombo port, which includes a successful container terminal run by China Merchants Port holdings.

Sri Lanka excessively borrowed from international capital markets in the form of sovereign bonds, term financing facilities and foreign holdings of gilt-edged securities. As of 2018, Sri Lanka’s total such borrowing amounted to US$15 bln. Sri Lanka must pay average interest rate of 6.3 percent on international sovereign bonds and the principal must be fully repaid, on average, within seven years.

In view of slow growth of exports and lack of foreign direct investments in the country, Sri Lanka is naturally facing debt servicing problem. Sri Lanka turned to costly commercial funding sources which was a common challenge for some developing countries between 2007 and 2009. Therefore, Sri Lanka’s debt issue is not due to loans from China as stated clearly its due to excessive borrowing from international capital markets at a high rate of interest and short repayment period couples with slow export growth and foreign direct investments.

Why does Sri Lankan government lease out the Hambantota port to China?

As of early 2019, these high interests borrowing took a heavy toll on Sri Lanka’s debt repayment and it exceeds a third of the total borrowings of Sri Lanka’s total debt. As a result, Sri Lanka faced a record foreign debt repayment of nearly US$6 billion in 2019. Due to dwindling reserves and tightening market conditions, leasing the Hambantota port was part of strategies to find cash – though it was popularly known as a sell out for China!

The Hambantota port lease was not a result of any inability to service the loans, nor was it a debt-for-equity swap — the Sri Lankan government still owns the port including its security. Funds received for the lease were not used to repay port-related debt, but to pay off more expensive loans, generally to Western entities.

If it was the case why new president of Sri Lanka wanted to re-negotiate the port deal and for a possible takeover by Sri Lanka.

In my opinion, it is purely due to geo-political reasons coupled with national security perspective of Sri Lanka. Sri Lanka is located at a strategic place in the Indian Ocean and key shipping route between Malacca straits and the Suez Canal which links Asia and Europe. An estimated 36,000 ships including 4500 oil tankers use this route annually. The Hambantota harbor too is located very close to major international shipping lanes connecting Middle East and Far East.

Sri Lanka has a close political, economic, religious, educational and cultural bond with India, which is considered as the closest neighbor for all matters for a long period. The close proximity between two countries and living a sizable Hindu community in Sri Lanka have brought the two countries closer. In fact, Indian’s influence has played a decisive role in shaping Sri Lanka’s foreign policy, democracy, devolution of power, and security perspectives. The closeness between two countries is evident by the fact that whenever a new president or prime minister is elected, his/her first official visit must be India. In general, India‘s status of God father and its parental leadership is a fact accepted by and large by the Sri Lankan civil society.

India, being the world’s sixth largest economy and dominant military and economic power in South Asia, is naturally unhappy about the port deal. India’s concerns over operation of the port by a Chinese-owned company for 99 years is justifiable. India already has boarder issues with Pakistan and China. Therefore, India considers the port leasing, in terms of its security, as a threat because Sri Lanka is in south of India and the issue is a very important factor affecting peace and security in south Asia.

Repeated assurances given by then sri Lankangovernment to unhappy India that port will be for civilian and commercial use and under the control of Sri Lankan authorities have not cleared the suspicion or managed to bring back the confidence in to Indian security establishment. In a counter move to balance this asymmetry, India now retrieve the loss by setting the Mattala international airport close to Hambantota port on a lease showing the India’s sensitivity in South Asia.

Sri Lanka is not only approached by China and India for strategic interests but USA too on the race by proposing to sign agreements with the so-called Acquisition and Cross-Service Agreements (ACSAs) who acquires logistics support, supplies, and services directly from Sri Lanka and to upgrade the existing Status of Forces Agreement (SOFA) to a more comprehensive agreement. Evidently, all three super powers have a stake in Sri Lanka in different forms to maintain the status quo.

Way out for Sri Lanka

In this overall context, it’s best that Sri Lanka to be a neutral country without being dragged into to regional conflicts between powerful countries. If Sri Lanka wants to convince super powers of its neutrality and non-alliance, the best way Sri Lanka can make is to be in control of its strategic ports, airports and other nerve centers without handing over to superpowers. The reason behind the new presidents’ earlier move to take back the Hambanthota port is to be looked at from this point of view. However, Sri Lanka has finally decided to stick to the agreement signed with Hong Kong-based China Merchants Port holdings and the probable reasons may be as follows.

(a) In essence, the lease agreement for 99 years is a commercial agreement and port security and the entry and exit of ships are within the scope of the port security handled by Sri Lanka.

(b) China also pledged to further invest USD 1.2 bln so repudiating such agreement may damage the trust between China and Sri Lanka built over a longer period.

(c) An act of this nature may not be seen positively in the eyes of international funding agencies from which Sri Lanka was dependent on funding for emergency.

(d) Another most important reason is Sri Lanka needs funding for its development objectives and the funding under the China-proposed Belt and Road Initiative is much cheaper than those borrowing from international capital markets.

So, Sri Lankan government’s decision to stick to the port agreement reminds us of the famous saying – medicine should not be more harmful than the decease itself.

(ASIA PACIFIC DAILY)