Chinese Financial Loans for White Elephant Tasks Plunge Sri Lanka and Pakistan into Current Crisis
The majority of the blame for the problem in these two countries cannot be placed on Beijing’s shoulders, as most of it rests on the myopic leadership of these countries.
Mattala Rajapaksa International Airport, located 18 kilometers from the Chinese port of Hambantota in Sri Lanka, has won the title of the least used airport in the world. The port and airport, which were built with high-interest loans from China’s EXIM bank during Mahinda Rajapaksa’s presidency, are monuments to the fiscal lavishness practiced by the island nation’s rulers today. today reeling from serious economic and political crises.
Pakistan, like Sri Lanka, is the biggest recipient of Chinese economic aid, and it too has been plunged into political and economic disaster. Instead of Chinese loans bolstering the economies of both countries, Beijing’s client nations all but collapsed in the aftermath of the pandemic-triggered global economic crisis that, strangely, originated in Wuhan, China.
Sri Lanka is currently experiencing protests over rising prices; Pakistan is in free fall, Imran Khan Niazi, who became Prime Minister in name only, having completely exposed the democratic fragility of the Islamic Republic for its survival.
Chinese Communist Party (CCP)-controlled media is calling Beijing’s predatory economic policies Western propaganda, saying loans to countries like Pakistan and Sri Lanka make up only a minor fraction of their overall portfolios of debts. These Chinese claims are supported by publicly available data on Chinese government-to-government lending. However, this is only half the story as information on the actual obligations of borrowing countries or the outflow of funds due to guaranteed returns on investments, commercial loans, etc. are not readily available.
As in the case of Pakistan, Beijing claimed that its loans accounted for 10% of Sri Lanka’s total external debt. This represents $5 billion out of a total debt of approximately $51 billion. However, currency swaps, currency term credit agreements and loans from Chinese state-owned enterprises are not included in this statistic. China’s EXIM bank is estimated to have issued $4.8 billion in project loans, of which just $1 billion carries a concessional interest rate of 2%, while the rest carries a staggering 6%.
In Pakistan, the Chinese bank EXIM lent USD 11 billion (concessional) at an interest rate of 1.6% for infrastructure projects and an additional USD 15.5 billion (commercial) at an interest rate of 5 % to 6% for energy projects under the China-Pakistan agreement. The Economic Corridor, which is part of the BRI and is designed to give Beijing access to the Arabian Sea and beyond. All bonds are denominated in US dollars, which hedges China’s vulnerability to exchange rate fluctuations but increases the cost of hard currency for borrowers. In Pakistan, the debt burden has continued to increase, with the Pakistani rupee depreciating at an average rate of 6% per year. In Sri Lanka, the Lankan rupee fell within days, dramatically increasing the cost of hard currency.
The majority of the blame for the problem in these two countries cannot be placed on Beijing’s shoulders, as most of it rests on the myopic leadership of these countries. Tempted by the cheap availability of Chinese financing to fund ambitious infrastructure projects that offer the naïve public a sense of rapid economic expansion, these politicians have thrown fiscal discipline and economic sustainability out the window to retain political power. These politically expedient loans have now come back to haunt these two countries, with Beijing unaware of whether the borrowing regime was corrupt, inefficient or both.
White elephant projects include Hambantota Port in Sri Lanka and Gwadar Port in the restive Balochistan region of Pakistan. Both ports are ideally positioned, but they are not commercially viable due to a lack of traffic. China has already acquired Hambantota, and it is no exaggeration to believe that it will also acquire Gwadar in the coming months. The truth is that these ports generate no real revenue and cargo traffic is diverted from the ports of Colombo and Karachi to keep them open. Meanwhile, Mattala Airport is sometimes used to store paddy.
The profit level of Chinese companies carrying out projects is also rarely known. This was accidentally demonstrated in Pakistan by the leak of the Power Producers Report in April 2020, which examined, among others, two thermal power projects in Sahiwal and Port Qasim. Both were made by Chinese companies. The report discovered an overpayment of Pak 483.64 billion, or about $3 billion, for these two projects totaling $3.8 billion.
Without evidence of a resolution to the Ukraine-Russia conflict and parts of China affected by the coronavirus, global finance will continue to lag, putting countries like Sri Lanka and Pakistan in the category. high risk for investments due to major political uncertainty.
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