China Says It Saved Sri Lanka From a 'Western Debt Trap' by Leasing Hambantota Port for 99 Years

Western states have accused Beijing of “debt-trap diplomacy” involving extending concessional loans to low and middle-income nations and allegedly extracting political concessions in return.

The Chinese Embassy in Colombo has said that the decision to lease the Hambantota Port from the Sri Lankan government in 2017 for 99 years was meant to actually save the island nation from the “Western debt trap”.

The port on the southern coast of Sri Lanka was jointly developed by China Harbor Engineering Company (CHEC) and the Sino-Hydro Corporation.

In a series of tweets, the embassy stated that the nearly $1.1 billion paid by state-backed CMPort to the Sri Lankan government to lease the Hambantota port for 99 years was used to pay off Colombo’s “high-interest-rate foreign borrowings”, including international sovereign bonds (ISBs).

The Chinese mission said that none of the proceeds from the 2017 deal were used to repay the debt Colombo owed to Beijing.

The remarks by the Chinese mission was made in response to a comment by Indian strategic analyst Brahma Chellaney, who accused Beijing of practicing “debt-trap diplomacy” in taking over the operations of the port through state-backed China Merchant Port Holdings (CMPort).

Chellaney cited a Sri Lankan parliament hearing organized by the Committee on Public Enterprises (COPE) on 22 June.

During the hearing, the committee members heard that the debt incurred by Colombo to develop the Hambantota port was to the tune of $1.7 billion, with the Sri Lankan Ports Authority incurring an additional loss of nearly $127 million before it decided to hand over the majority stakes of the port to CMPort in 2017.

While responding to Chellaney, the Chinese embassy further clarified that CMPort acquired majority stakes in the Hambantota port for 99 years only after other foreign governments refused to buy into Colombo’s offer to take over operations.

Previous media reports claim that the Sri Lankan government approached India and the US before asking Beijing to take over the Hambantota port.

“74 percent of China's EXIM Bank loan is concessional, with only a 2 per cent interest rate,” the Chinese mission claimed.

The embassy also claimed that the development of the port was entirely feasible, thus rebutting widespread claims that developing a port on the southern coast of Sri Lanka was never a viable proposition to begin with.

It said that the “feasibility studies” for the project were carried out by Canadian and Danish companies. Both the Canadian International Development Agency (CIDA) and the Danish firm Ramboll had given a go-ahead to the port’s development, as per a report in The Atlantic last February.

The embassy underlined that Hambantota had witnessed a 59 percent increase in its bulk cargo operations in 2021, handling over 1 million metric tons of dry bulk. Further, it claimed that the port handled 2.3 million metric tons of cargo overall last year.

The exchange between the Chinese Embassy and the Indian strategic analyst came against the backdrop of Colombo facing its worst economic crisis since Independence in 1948, caused by depleting forex reserves leading to the government unable to pay for fuel, food and other essential imports.

The government announced in April that it would temporarily suspend all external debt payments, amounting to around $15 billion.

Sri Lanka’s Central Bank Governor Nandalal Weerasinghe said this month that around 15 percent of Colombo’s debt obligations are owed to Beijing.

The Sri Lankan government is currently negotiating a $3 billion bailout package under an Extended Fund Facility (EFF) of the International Monetary Fund (IMF), Reuters reported this month. An IMF delegation landed in the country last week to review the situation and take a call on the government’s loan request.