Chinese 'debt-diplomacy' is drowning Sri Lanka's economy and environment

New skyscrapers stand out against the modern skyline of Colombo, Sri Lanka’s commercial and financial capital, disrupting the soft profile of what once was its tropical coastline and colonial architecture. From Galle Face, the promenade built during Dutch rule on the island stretching along the boundless Indian Ocean, one can get a glimpse of the coastline and the new projects taking shape.

Across the street, behind the grassy park, the cranes know no rest; floodlights allow the construction drive to continue at night, making the area look like a vast stage set under production, where the bustle of machines mixes with the tranquil ocean. Proceeding towards the huge harbour north of Galle Face, the commercial district, Fort, and its colonial buildings are a vivid reminder of the Dutch times.

Due to its position in the Indian Ocean, Sri Lanka has historically been an important commercial hub along maritime routes. The Portuguese and the Dutch ruled it before the British came to the island until Sri Lanka finally gained independence in 1948. Right next to the fort, backed against the commercial harbour, a new metropolis is feverishly being erected where just the sea used to lie.

The construction of the new residential area on the 2.6 square kilometres of land reclaimed from the sea will be starting soon: the master plan includes luxurious apartments, 5-star hotels, a financial district, a golf club, a marina and a Formula One circuit overlooking the Indian Ocean—all framed by tropical beaches and lush green parks.

The city is considered a significant stop on China’s Belt and Road Initiative, 'yi dai yi lu', a gargantuan plan to connect 71 strategic points in Asia, Africa and Europe through a belt of land corridors and a road of sea routes: a commercial network aimed at sustaining Chinese economic expansion.

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Built on an artificial island reclaimed from the ocean by filling 65 million cubic meters of sand against the coast, Colombo Port City will be a free zone ruled by a business-friendly tax regime and, most likely, will have its own legal system.

“Port City will pose major administrative and benefit-sharing issues: it is proposed to run under new regulations, like a financial hub, whose details are not yet publicly available,” asserts Hemantha Withanage, Executive Director of the Colombo-based Centre for Environmental Justice. Withanage claims that the successive Rajapaksa and Maithree-Ranil governments have not been held accountable to the public for the project.

In 2014, Prime Minister Ranil Wickramasinghe of the United National Party shelved the project because it would compromise the coastal strip north and south of Colombo.

In 2015, work had stopped due to concerns related to its impact on the coast and related activities, like fishing and tourism, though they resumed the following year, likely due to Chinese pressure.

“The new Environmental Impact Assessment (EIA) simply green-washed the project without adding substantial changes,” explains Withanage, head of the environmental organisation that in 2015 filed a lawsuit against the Port City. 

“The only major change in the project was the shift from 235 hectares of land of the first proposal to the current 269, but the total impact could actually be much more.” 

The state-owned China Communications Construction Company (CCCC), through its subsidiary the China Harbour Engineering Company (CHEC), is the firm behind the $1.4 billion project, one of the largest foreign investments in Sri Lanka, to date.

The CCCC, a Chinese real estate investor and developer blacklisted by the World Bank on allegations of corruption, financed a variety of infrastructure on the island: the Southern Highway, the Outer Circular Highway, Matala International Airport and Hambantota Port.

The latter, a $1.5-billion project named after the former president Mahinda Rajapaksa, was partly funded by a Chinese loan. In 2017, the country, unable to pay off the debt, had no choice but to lease the port to a Chinese firm in a 99-year debt-for-equity swap.

Previous governments, under the controversial leader Mahinda Rajapaksa of the Sri Lankan Freedom Party, borrowed 8 billion dollars from China, most of which was spent on bloated infrastructure projects near his hometown, Hambantota. 

When China started investing, the country was recovering from two and half decades of a brutal civil war between the Sinhalese government and the Tamil Tigers, that killed over 100,000 people.

The country’s economy stalled until the Sinhalese army victory put an end to the conflict and opened the doors to foreign players, who have been reluctant to invest in a country where human rights violations have been perpetrated with impunity from both sides. In those years, China was one of the few international creditors to invest in the country’s reconstruction.

Many of those who oppose the project claim that those in power have not been held accountable for the many murky aspects of the new Port City. It’s been argued that, despite the project’s obvious economic benefits, environmental issues have not been adequately addressed. 

TRT World contacted the CHEC over the phone, but they refused to comment.

Among the many adverse effects of the project, the dredged seabed will cause changes in the marine currents and, hence, an exponential increase in coastal erosion with related damages to coastal activities like tourism and fisheries. The new breakwater, built to protect the island, will add to the erosion, damaging the coral reef, while the coastal economy will be put at risk, together with the livelihood of some 15,000 fishermen.

“Under the Right to Information Act, we requested the ministry involved in the Port City project to disclose the details of the agreement between our country and China - after two refusals, we turned to the RTI Commission,” explains Withanage to TRT World, “What should we think if the government is not ready to disclose the terms and consequences of the project? We are very afraid of what will be decided for its future structure.”

Rumours are that the city will be a financial hub with legislation of its own, distinct from Sri Lanka's laws. Unlike Hambantota port, the Port City is a direct Chinese investment, not a loan, which would give China even more of an upper hand in decision making. Some analysts fear the multi-billion dollar Belt and Road Initiative (BRI) could be the Trojan horse of China’s economic global penetration through a system of “debt-traps”.

A report published last year by the Center for Global Development (CDG) of the Harvard Kennedy School questions the role of what the authors define as “debt diplomacy” – the practice of lending millions of dollars to countries that cannot afford to pay back, using the debt as a leverage on assets and sovereignty – and identifies eight potential target-countries of debt insolvency. Among them are Sri Lanka and Pakistan.

“For most BRI countries, borrowing from China does not pose near-term debt risks. In the same way, I do not think the Chinese government is in a position to create debt traps in most countries. However, a small number of countries, including Sri Lanka, are vulnerable to debt distress and continue to borrow from China in ways that exacerbate these vulnerabilities,” explains Scott Morris, Senior Fellow at the Center for Global Development, who is one of the authors of the report, to TRT World.

“Problems also arise when borrowing is not supported by economically viable projects – he argues - cases like Hambantota port suggest that strong due diligence is often missing when evaluating the costs and benefits of major infrastructure investments.”

Sri Lanka’s situation is quoted as a cautionary tale, but the voices are dissenting on the dangers it implies. 

“In terms of debt, China accounts for only 9 percent of the country’s total outstanding debt. Sri Lanka has relied on borrowing on commercial terms through ISBs, FTFFs and foreign holding of treasury bonds and bills,” argues Kithmina Hewage, an economist with the Institute of Policy Studies in Colombo. 

“Therefore, while Chinese loans have contributed to Sri Lanka’s debt, it is not the primary cause but only a secondary factor,” he claims. 

Today, the country is caught up in a classic vicious cycle of ever-increasing loans to pay old debts and finance ongoing deficits. This high-interest borrowing now exceeds a third of Sri Lanka’s total debt, which faces a 6-billion-dollar foreign debt repayment.

With Chinese companies investing in many host countries’ infrastructures through bilateral agreements, the so-called “Silk Road of the 21st Century” represents a significant game-changer in the geopolitical balance of the area. 

The ambitious plan has raised concerns in India, a historic rival in the region, who considers the Indian Ocean as its backyard and cannot stand idle watching the growing Chinese presence in the area.

New Delhi views with growing suspicion the architecture of Chinese ties with its old-time enemies, while the new Chinese-funded ports raise concerns for a country that suffers from a chronic “encirclement phobia”. 

The geopolitical theory behind it, the “String of Pearls”, sees the network of Chinese commercial and strategic facilities and relations along its marine routes as a security threat. China denies any military ambitions in the area.

On the other side of the Palk Strait that divides India from the tear-shaped island of Sri Lanka, work on the new Chinese-funded city proceeds at breakneck speed, despite several unanswered questions. 

While many people in Sri Lanka view the foreign investments in a positive light, some have started questioning the Chinese role in the country. The fear is that Port City, like the Hambantota port, could soon translate into another loss of sovereignty for the small island.