Features
Debt Trap Lessons
By DEVENDRA SAKSENA
Currently, the words ‘debt trap’ have a distinctly Chinese connotation. According to the Western press, the Chinese, as part of their geostrategy, have inveigled poor nations into borrowing huge amounts from them for fanciful infrastructural projects; almost all borrower countries are in dire economic straits, because most such projects are lying incomplete, or not yielding anticipated returns. Referring to Chinese lending as ‘debt-trap diplomacy,’ Western leaders would have us believe that China deliberately lends money to poor countries on overly challenging terms, so that loans could not be repaid, forcing borrowers to accept eco- nomic or political concessions. Western nations blame China for using ‘debt-trap diplomacy’ to promote Chinese geopolitical interests in Asia and Africa.
Exact data about Chinese lending is not in the public do- main, as China does not report its international lending, and agreements with debtor countries prohibit disclosure about Chinese loans. In many cases, Chinese companies advance loans to state-owned companies of the borrower nation, which do not figure in the borrower country’s budget. Also, China is not a member of the Paris Club or the OECD, so it is under no obligation to reveal details about the monies lent by it. But today, China is the world’s largest official creditor ~ surpassing traditional lenders such as the World Bank, the IMF, or all OECD creditor governments combined. Chinese credit is widespread.
According to Aid Data, China has financed 13,427 development projects, worth US$843 billion dollars in 165 countries, while the Harvard Business Review has estimated that the Chinese Government and State- owned companies have lent about US$1.5 trillion in direct loans, and trade credits, to more than 150 countries. For most poor countries, Chinese lending is substantial vis-à-vis their GDP. According to a study conducted by the Harvard Business Review: “For the 50 main developing country recipients, we estimate that the average stock of debt owed to China has increased from less than 1 percent of debtor country GDP in 2005 to more than 15 per cent in 2017.
A dozen of these countries owe debt of at least 20 percent of their nominal GDP to China (Djibouti, Tonga, Maldives, the Republic of the Congo, Kyrgyzstan, Cambodia, Niger, Laos, Zambia, Samoa, Vanuatu, and Mongolia).” Chinese lending gained impetus in 2013, when President Xi Jinping announced the Belt and Road Initiative (BRI), a global infrastructure development and investment strategy, under which China financed huge infrastructural projects like ports, railways, roadways, bridges, dams, and power stations in the poor developing countries of Asia and Africa ~ though BRI also includes 17 European Union countries and 22 countries in the Caribbean and South America. Repaying Chinese loans is not easy because unlike other official lenders such as the World Bank that provide finance at concessional, below-market interest rates, and longer tenures, China tends to lend at market terms, at interest rates close to those prevailing in private capital markets.
Additionally, the Chinese insist on collateral, meaning that debt repayments are secured by assets or future revenues. Western leaders cite the example of two of India’s neighbours, Sri Lanka and Pakistan, to drive home the dangers of taking loans from China. Initially, Sri Lanka got huge loans from Chinese government banks to build infrastructure like airports, sea- ports and bridges. However, revenue generated from Chinese-funded projects was insufficient to repay the Chinese loans. The largest such projects, Hambantota Harbour and Mattala Rajapaksa International Airport (MRIA), are case studies in the menace of easy Chinese loans; MRIA is lying unused while Hambantota Har- bour has been taken over by the Chinese, on a ninety-nine years lease, because Chinese debt could not be repaid. The Western press attributes Sri Lanka’s recent economic crisis, which saw day-long power cuts, soaring prices of food and other essentials, as inflation reaching twenty-five per cent, solely to problems created by Chinese loans. Sadly, for Sri Lanka, the economic meltdown metamorphosed into a political crisis. Following massive public protests, the Government had to resign. These twin crises brought Sri Lanka to the verge of sovereign default; only generous interventions by India and the IMF have kept the Sri Lankan economy afloat. A similar script is playing out in Pakistan, which had borrowed heavily from China, for its BRI project. However, Chinese ‘debt- trap diplomacy’ is not the sole reason for the economic ruin of Sri Lanka; Chinese loans accounted for only 10.8 percent of Sri Lanka’s debt burden, the rest comprising International Sovereign Bonds (36.4 per cent), Asian Development Bank (14.3 per cent), and Japan (10.9 per cent). Also, the Lankan economy was already on the verge of collapse because of the myriad unwise and populist policies of the Rajapaksa government. The failed projects, Hambantota Harbour and Mattala Rajapaksa International Airport (MRIA), were vanity projects of the Rajapaksa family, located in their backyard, at unsuitable venues; feasibility study of both projects had been conducted, not by Chinese, but by European companies. Finally, no planner could have factored in the humongous corruption, which made both projects unviable. Contrarily, China and the beneficiaries of its loans do not view Chinese loans as ‘debt-trap diplomacy’; Chinese see themselves as daring entrepreneurs, identifying economic opportunity in pro- viding loans to failing countries, and generating enormous profits from it ~ both in terms of money and resources. Many countries that have a colossal Chinese debt burden consider China as their closest friend. Acknowledging China as their prime growth catalyst, Kenyan and Comoros’ leaders hold that Africa’s only trap is ‘Poverty and Underdevelopment.’
Undoubtedly, China is the lender of last resort; unlike the World Bank and IMF, China does not insist that borrowing countries change their economic policies; it also does not check the credit history of its borrowers. Like Shylock, it could be that China is more sinned against than sinning. Since time immemorial, kings had borrowed money to secure borders, or to launch foreign military campaigns, but by the end of the twentieth century, countries were borrowing not to prosecute wars or to overcome crises but on revenue account ~ for pensions, health care, and other social services i.e., ‘revdis’ in current political parlance. The Latin American debt crisis of the 1970s and 80s, primarily affecting Brazil, Argentina and Mexico, unfolded with these countries contracting loans for development ~ mainly infrastructure projects. Slowly, borrowings, mostly from private banks, ballooned to fifty per cent of the region’s GDP. Mexico borrowed against future oil revenues; when the price of oil collapsed, so did the Mexican economy. Other Latin American countries’ economies collapsed for a diametrically opposite reason; when oil prices skyrocketed, interest rates increased, and debts became unsustainable. Ultimately, loans had to be restructured with help from the World Bank and IMF.
Currently, soaring Indian sovereign debt is causing concern to the IMF. As on 31 March 2023, the Central Government owed Rs.152.61 lakh crores amounting to 57 percent of GDP, while State Governments owed around Rs.75 lakh crore, which is 28 percent of GDP. According to Budget Estimates, the Central Government debt, which has more than doubled in the last ten years, is projected to increase to Rs.169.47 lakh crore by 31 March 2024. Worryingly, the IMF has forecast that public debt will exceed India’s GDP in the medium term, at a time when considerable investment will be required to improve resilience to climate stresses and natural disasters.
The IMF has suggested “ambitious” fiscal consolidation over the medium term, in order to curb India’s public debt. During the course of Article IV discussions with the IMF, Indian officials rightly pointed out that foreign debt was barely three percent of the public debt, so a ‘debt-trap’ situation was not in the making. Moreover, given the high Indian GDP growth rate, debt to GDP ratio had not increased significantly over the years. Yet, ill-effects of profligate spending, resulting in high indebtedness, are becoming visible. Deficit financing, used to finance the Government’s ambitious infrastructure development programmes and ‘revdis’ like Kisan Sanman Nidhi, has risen to Rs.17.86 lakh crore, or 5.9 per cent of the GDP. Also, during FY 2023-24, out of total expenditure of Rs.38.50 lakh crore, approximately Rs.11 lakh crores will go towards interest payments. Thus, a vicious cycle is created; the Government garners resources by deficit financing, which increases the interest burden, leading to more deficit financing. Foreign rating agencies hesitate to improve our ranking, despite our strong fundamentals, only because of weak financial management and high debt. Ultimately, we have to realise that the Charvaka philosophy of drinking ghee from borrowed funds, is totally inappropriate for modern economic management.
by Dr Gotabhya Ranasinghe
Senior Consultant Cardiologist
National Hospital Sri Lanka
When we sought a meeting with Hon Dr. Ramesh Pathirana, Minister of Health, he graciously cleared his busy schedule to accommodate us. Renowned for his attentive listening and deep understanding, Minister Pathirana is dedicated to advancing the health sector. His openness and transparency exemplify the qualities of an exemplary politician and minister.
Dr. Palitha Mahipala, the current Health Secretary, demonstrates both commendable enthusiasm and unwavering support. This combination of attributes makes him a highly compatible colleague for the esteemed Minister of Health.
Our discussion centered on a project that has been in the works for the past 30 years, one that no other minister had managed to advance.
Minister Pathirana, however, recognized the project’s significance and its potential to revolutionize care for heart patients.
The project involves the construction of a state-of-the-art facility at the premises of the National Hospital Colombo. The project’s location within the premises of the National Hospital underscores its importance and relevance to the healthcare infrastructure of the nation.
This facility will include a cardiology building and a tertiary care center, equipped with the latest technology to handle and treat all types of heart-related conditions and surgeries.
Securing funding was a major milestone for this initiative. Minister Pathirana successfully obtained approval for a $40 billion loan from the Asian Development Bank. With the funding in place, the foundation stone is scheduled to be laid in September this year, and construction will begin in January 2025.
This project guarantees a consistent and uninterrupted supply of stents and related medications for heart patients. As a result, patients will have timely access to essential medical supplies during their treatment and recovery. By securing these critical resources, the project aims to enhance patient outcomes, minimize treatment delays, and maintain the highest standards of cardiac care.
Upon its fruition, this monumental building will serve as a beacon of hope and healing, symbolizing the unwavering dedication to improving patient outcomes and fostering a healthier society.We anticipate a future marked by significant progress and positive outcomes in Sri Lanka’s cardiovascular treatment landscape within the foreseeable timeframe.
by Fr. Emmanuel Fernando, OMI
Jesuit Fr. Aloysius Pieris (affectionately called Fr. Aloy) celebrated his 90th birthday on April 9, 2024 and I, as the editor of our Oblate Journal, THE MISSIONARY OBLATE had gone to press by that time. Immediately I decided to publish an article, appreciating the untiring selfless services he continues to offer for inter-Faith dialogue, the renewal of the Catholic Church, his concern for the poor and the suffering Sri Lankan masses and to me, the present writer.
It was in 1988, when I was appointed Director of the Oblate Scholastics at Ampitiya by the then Oblate Provincial Fr. Anselm Silva, that I came to know Fr. Aloy more closely. Knowing well his expertise in matters spiritual, theological, Indological and pastoral, and with the collaborative spirit of my companion-formators, our Oblate Scholastics were sent to Tulana, the Research and Encounter Centre, Kelaniya, of which he is the Founder-Director, for ‘exposure-programmes’ on matters spiritual, biblical, theological and pastoral. Some of these dimensions according to my view and that of my companion-formators, were not available at the National Seminary, Ampitiya.
Ever since that time, our Oblate formators/ accompaniers at the Oblate Scholasticate, Ampitiya , have continued to send our Oblate Scholastics to Tulana Centre for deepening their insights and convictions regarding matters needed to serve the people in today’s context. Fr. Aloy also had tried very enthusiastically with the Oblate team headed by Frs. Oswald Firth and Clement Waidyasekara to begin a Theologate, directed by the Religious Congregations in Sri Lanka, for the contextual formation/ accompaniment of their members. It should very well be a desired goal of the Leaders / Provincials of the Religious Congregations.
Besides being a formator/accompanier at the Oblate Scholasticate, I was entrusted also with the task of editing and publishing our Oblate journal, ‘The Missionary Oblate’. To maintain the quality of the journal I continue to depend on Fr. Aloy for his thought-provoking and stimulating articles on Biblical Spirituality, Biblical Theology and Ecclesiology. I am very grateful to him for his generous assistance. Of late, his writings on renewal of the Church, initiated by Pope St. John XX111 and continued by Pope Francis through the Synodal path, published in our Oblate journal, enable our readers to focus their attention also on the needed renewal in the Catholic Church in Sri Lanka. Fr. Aloy appreciated very much the Synodal path adopted by the Jesuit Pope Francis for the renewal of the Church, rooted very much on prayerful discernment. In my Religious and presbyteral life, Fr.Aloy continues to be my spiritual animator / guide and ongoing formator / acccompanier.
Fr. Aloysius Pieris, BA Hons (Lond), LPh (SHC, India), STL (PFT, Naples), PhD (SLU/VC), ThD (Tilburg), D.Ltt (KU), has been one of the eminent Asian theologians well recognized internationally and one who has lectured and held visiting chairs in many universities both in the West and in the East. Many members of Religious Congregations from Asian countries have benefited from his lectures and guidance in the East Asian Pastoral Institute (EAPI) in Manila, Philippines. He had been a Theologian consulted by the Federation of Asian Bishops’ Conferences for many years. During his professorship at the Gregorian University in Rome, he was called to be a member of a special group of advisers on other religions consulted by Pope Paul VI.
Fr. Aloy is the author of more than 30 books and well over 500 Research Papers. Some of his books and articles have been translated and published in several countries. Among those books, one can find the following: 1) The Genesis of an Asian Theology of Liberation (An Autobiographical Excursus on the Art of Theologising in Asia, 2) An Asian Theology of Liberation, 3) Providential Timeliness of Vatican 11 (a long-overdue halt to a scandalous millennium, 4) Give Vatican 11 a chance, 5) Leadership in the Church, 6) Relishing our faith in working for justice (Themes for study and discussion), 7) A Message meant mainly, not exclusively for Jesuits (Background information necessary for helping Francis renew the Church), 8) Lent in Lanka (Reflections and Resolutions, 9) Love meets wisdom (A Christian Experience of Buddhism, 10) Fire and Water 11) God’s Reign for God’s poor, 12) Our Unhiddden Agenda (How we Jesuits work, pray and form our men). He is also the Editor of two journals, Vagdevi, Journal of Religious Reflection and Dialogue, New Series.
Fr. Aloy has a BA in Pali and Sanskrit from the University of London and a Ph.D in Buddhist Philosophy from the University of Sri Lankan, Vidyodaya Campus. On Nov. 23, 2019, he was awarded the prestigious honorary Doctorate of Literature (D.Litt) by the Chancellor of the University of Kelaniya, the Most Venerable Welamitiyawe Dharmakirthi Sri Kusala Dhamma Thera.
Fr. Aloy continues to be a promoter of Gospel values and virtues. Justice as a constitutive dimension of love and social concern for the downtrodden masses are very much noted in his life and work. He had very much appreciated the commitment of the late Fr. Joseph (Joe) Fernando, the National Director of the Social and Economic Centre (SEDEC) for the poor.
In Sri Lanka, a few religious Congregations – the Good Shepherd Sisters, the Christian Brothers, the Marist Brothers and the Oblates – have invited him to animate their members especially during their Provincial Congresses, Chapters and International Conferences. The mainline Christian Churches also have sought his advice and followed his seminars. I, for one, regret very much, that the Sri Lankan authorities of the Catholic Church –today’s Hierarchy—- have not sought Fr.
Aloy’s expertise for the renewal of the Catholic Church in Sri Lanka and thus have not benefited from the immense store of wisdom and insight that he can offer to our local Church while the Sri Lankan bishops who governed the Catholic church in the immediate aftermath of the Second Vatican Council (Edmund Fernando OMI, Anthony de Saram, Leo Nanayakkara OSB, Frank Marcus Fernando, Paul Perera,) visited him and consulted him on many matters. Among the Tamil Bishops, Bishop Rayappu Joseph was keeping close contact with him and Bishop J. Deogupillai hosted him and his team visiting him after the horrible Black July massacre of Tamils.
Sri Lanka-Singapore Free Trade Agreement
By Gomi Senadhira
senadhiragomi@gmail.com
“You might tell fairy tales, but the progress of a country cannot be achieved through such narratives. A country cannot be developed by making false promises. The country moved backward because of the electoral promises made by political parties throughout time. We have witnessed that the ultimate result of this is the country becoming bankrupt. Unfortunately, many segments of the population have not come to realize this yet.” – President Ranil Wickremesinghe, 2024 Budget speech
Any Sri Lankan would agree with the above words of President Wickremesinghe on the false promises our politicians and officials make and the fairy tales they narrate which bankrupted this country. So, to understand this, let’s look at one such fairy tale with lots of false promises; Ranil Wickremesinghe’s greatest achievement in the area of international trade and investment promotion during the Yahapalana period, Sri Lanka-Singapore Free Trade Agreement (SLSFTA).
It is appropriate and timely to do it now as Finance Minister Wickremesinghe has just presented to parliament a bill on the National Policy on Economic Transformation which includes the establishment of an Office for International Trade and the Sri Lanka Institute of Economics and International Trade.
Was SLSFTA a “Cleverly negotiated Free Trade Agreement” as stated by the (former) Minister of Development Strategies and International Trade Malik Samarawickrama during the Parliamentary Debate on the SLSFTA in July 2018, or a colossal blunder covered up with lies, false promises, and fairy tales? After SLSFTA was signed there were a number of fairy tales published on this agreement by the Ministry of Development Strategies and International, Institute of Policy Studies, and others.
However, for this article, I would like to limit my comments to the speech by Minister Samarawickrama during the Parliamentary Debate, and the two most important areas in the agreement which were covered up with lies, fairy tales, and false promises, namely: revenue loss for Sri Lanka and Investment from Singapore. On the other important area, “Waste products dumping” I do not want to comment here as I have written extensively on the issue.
1. The revenue loss
During the Parliamentary Debate in July 2018, Minister Samarawickrama stated “…. let me reiterate that this FTA with Singapore has been very cleverly negotiated by us…. The liberalisation programme under this FTA has been carefully designed to have the least impact on domestic industry and revenue collection. We have included all revenue sensitive items in the negative list of items which will not be subject to removal of tariff. Therefore, 97.8% revenue from Customs duty is protected. Our tariff liberalisation will take place over a period of 12-15 years! In fact, the revenue earned through tariffs on goods imported from Singapore last year was Rs. 35 billion.
The revenue loss for over the next 15 years due to the FTA is only Rs. 733 million– which when annualised, on average, is just Rs. 51 million. That is just 0.14% per year! So anyone who claims the Singapore FTA causes revenue loss to the Government cannot do basic arithmetic! Mr. Speaker, in conclusion, I call on my fellow members of this House – don’t mislead the public with baseless criticism that is not grounded in facts. Don’t look at petty politics and use these issues for your own political survival.”
I was surprised to read the minister’s speech because an article published in January 2018 in “The Straits Times“, based on information released by the Singaporean Negotiators stated, “…. With the FTA, tariff savings for Singapore exports are estimated to hit $10 million annually“.
As the annual tariff savings (that is the revenue loss for Sri Lanka) calculated by the Singaporean Negotiators, Singaporean $ 10 million (Sri Lankan rupees 1,200 million in 2018) was way above the rupees’ 733 million revenue loss for 15 years estimated by the Sri Lankan negotiators, it was clear to any observer that one of the parties to the agreement had not done the basic arithmetic!
Six years later, according to a report published by “The Morning” newspaper, speaking at the Committee on Public Finance (COPF) on 7th May 2024, Mr Samarawickrama’s chief trade negotiator K.J. Weerasinghehad had admitted “…. that forecasted revenue loss for the Government of Sri Lanka through the Singapore FTA is Rs. 450 million in 2023 and Rs. 1.3 billion in 2024.”
If these numbers are correct, as tariff liberalisation under the SLSFTA has just started, we will pass Rs 2 billion very soon. Then, the question is how Sri Lanka’s trade negotiators made such a colossal blunder. Didn’t they do their basic arithmetic? If they didn’t know how to do basic arithmetic they should have at least done their basic readings. For example, the headline of the article published in The Straits Times in January 2018 was “Singapore, Sri Lanka sign FTA, annual savings of $10m expected”.
Anyway, as Sri Lanka’s chief negotiator reiterated at the COPF meeting that “…. since 99% of the tariffs in Singapore have zero rates of duty, Sri Lanka has agreed on 80% tariff liberalisation over a period of 15 years while expecting Singapore investments to address the imbalance in trade,” let’s turn towards investment.
Investment from Singapore
In July 2018, speaking during the Parliamentary Debate on the FTA this is what Minister Malik Samarawickrama stated on investment from Singapore, “Already, thanks to this FTA, in just the past two-and-a-half months since the agreement came into effect we have received a proposal from Singapore for investment amounting to $ 14.8 billion in an oil refinery for export of petroleum products. In addition, we have proposals for a steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million), sugar refinery ($ 200 million). This adds up to more than $ 16.05 billion in the pipeline on these projects alone.
And all of these projects will create thousands of more jobs for our people. In principle approval has already been granted by the BOI and the investors are awaiting the release of land the environmental approvals to commence the project.
I request the Opposition and those with vested interests to change their narrow-minded thinking and join us to develop our country. We must always look at what is best for the whole community, not just the few who may oppose. We owe it to our people to courageously take decisions that will change their lives for the better.”
According to the media report I quoted earlier, speaking at the Committee on Public Finance (COPF) Chief Negotiator Weerasinghe has admitted that Sri Lanka was not happy with overall Singapore investments that have come in the past few years in return for the trade liberalisation under the Singapore-Sri Lanka Free Trade Agreement. He has added that between 2021 and 2023 the total investment from Singapore had been around $162 million!
What happened to those projects worth $16 billion negotiated, thanks to the SLSFTA, in just the two-and-a-half months after the agreement came into effect and approved by the BOI? I do not know about the steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million) and sugar refinery ($ 200 million).
However, story of the multibillion-dollar investment in the Petroleum Refinery unfolded in a manner that would qualify it as the best fairy tale with false promises presented by our politicians and the officials, prior to 2019 elections.
Though many Sri Lankans got to know, through the media which repeatedly highlighted a plethora of issues surrounding the project and the questionable credentials of the Singaporean investor, the construction work on the Mirrijiwela Oil Refinery along with the cement factory began on the24th of March 2019 with a bang and Minister Ranil Wickremesinghe and his ministers along with the foreign and local dignitaries laid the foundation stones.
That was few months before the 2019 Presidential elections. Inaugurating the construction work Prime Minister Ranil Wickremesinghe said the projects will create thousands of job opportunities in the area and surrounding districts.
The oil refinery, which was to be built over 200 acres of land, with the capacity to refine 200,000 barrels of crude oil per day, was to generate US$7 billion of exports and create 1,500 direct and 3,000 indirect jobs. The construction of the refinery was to be completed in 44 months. Four years later, in August 2023 the Cabinet of Ministers approved the proposal presented by President Ranil Wickremesinghe to cancel the agreement with the investors of the refinery as the project has not been implemented! Can they explain to the country how much money was wasted to produce that fairy tale?
It is obvious that the President, ministers, and officials had made huge blunders and had deliberately misled the public and the parliament on the revenue loss and potential investment from SLSFTA with fairy tales and false promises.
As the president himself said, a country cannot be developed by making false promises or with fairy tales and these false promises and fairy tales had bankrupted the country. “Unfortunately, many segments of the population have not come to realize this yet”.
(The writer, a specialist and an activist on trade and development issues . )
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