China's 'debt-trap diplomacy' behind Sri Lanka crisis: Report

COLOMBO: While Sri Lanka faces its worst economic crisis since independence with food and fuel shortages, soaring prices and power cuts, many believe that China's "debt-trap diplomacy" is behind the crisis, said a media report. Writing in Channel News Asia (CNA), R Ramakumar, a Professor of Economics at Tata Institute of Social Sciences, highlighted that China's "debt-trap" policy is singularly responsible for the dire economic situation of Sri Lanka.

"Many believe that Sri Lanka's economic relations with China are the main driver behind the crisis. The United States has called this phenomenon debt-trap diplomacy," the report said. The report further stated that this is where a creditor country or institution extends debt to a borrowing nation to increase the lender's political leverage - if the borrower extends itself and cannot pay the money back, they are at the creditor's mercy.

Defaults over China's infrastructure-related loans to Sri Lanka, especially the financing of the Hambantota port, are being cited as factors contributing to the crisis, the report noted. The construction of the Hambantota port was financed by the Chinese Exim Bank. The port was running into losses, so Sri Lanka leased out the port for 99 years to the Chinese Merchant's Group, which paid Sri Lanka USD 1.12 billion, the report said.

The island relies on the import of many essential items, including petrol, food items and medicines. Most countries will keep foreign currencies on hand in order to trade for these items, but a shortage of foreign exchange in Sri Lanka is being blamed for the "sky-high prices", Ramakumar said. On April 1, Sri Lankan President Gotabaya Rajapaksa had declared a state of emergency, which was withdrawn within a week, following massive protests by angry citizens over the government's handling of the crisis.

Sri Lanka is now experiencing its greatest economic crisis since independence from British rule in 1948. The slump is blamed on currency shortages caused by the travel ban imposed during the COVID-19 epidemic. This has resulted in the nation's inability to purchase sufficient fuel, resulting in an extreme shortage of food and essential commodities such as heating fuel and gas. Sri Lanka appears to be on the edge of a "humanitarian crisis", according to the United Nations Development Programme, as its financial troubles grow, with rising food prices, and the country's coffers having run dry. According to World Bank estimates, five lakh people in Sri Lanka have fallen below the poverty line since the onset of the crisis, according to the World Bank.