The loans obtained from China for HIP were being serviced by the Treasury of Sri Lanka. Between 2013-2017, these HIP loans were included in the balance sheet of the SLPA as a “non-guaranteed” foreign loan to the SLPA

Dr. Muttukrishna Sarvananthan of Point Institute of Development in Jaffna, says that Chinese lending to Sri Lanka between 2007 and 2022 was marked by an absence of due diligence, hidden conditions and aggressive lobbying with politicians and bureaucrats. These were “predatory” practices, he says. But still, he would classify Chinese lending as “quasi-predatory” rather than “predatory” because the lower rates of interest charged counter-balanced the predatory practices.

Sarvananthan’s contentions are found in his critique of “Evolution of Chinese Lending to Sri Lanka since the mid-2000s – Separating Myth from Reality” written by Umesh Moramudali and Thilina Panduwawala and published by the China-Africa Research Initiative of the School of Advanced International Studies (SAIS) at the Johns Hopkins University.

In the critique entitled Chinese Lending to Sri Lanka: A Factual cum Reality Check: A Rejoinder to Umesh Moramudali and Thilina  Panduwawala, Sarvananthan agrees that the leasing of the Hambantota International Port (HIP) to the China Harbour Group in 2017 was not an “asset seizure” because the port was never made collateral for the loans from the China Exim Bank. It was not a “debt-to-equity swap” either, because the money received for granting 85% of the equity stake to the China Harbour Group (CHG) was not utilized to repay the loans borrowed for the purpose of building and expanding the port. 

The problem was elsewhere, Sarvananthan says. As Moramudali and Panduwawala point out, the funds obtained from the Chinese company for leasing the port for 99 years, were used to pay off Sri Lanka’s International Sovereign Bonds (ISB). This amounts to malpractice, Savananthan contends. 

Hidden Debt  
Moramudali and Panduwawala found that the loans obtained from China for HIP were being serviced by the Treasury of Sri Lanka. Between 2013-2017, these HIP loans were included in the balance sheet of the SLPA as a “non-guaranteed” foreign loan to the Sri Lanka Ports Authority (SLPA). In 2017, the Treasury had taken over these loans from the balance sheet of the SLPA.

Moramudali and Panduwawala also say that the signing of all five loan agreements between SLPA and a Chinese supplier or contractors responsible for constructing the port, had taken place months before the signing of the loan agreement between the GoSL and ChEXIM. To Sarvananthan, this is another example of the “predatory nature” of the Chinese loans for the Hambantota port. He asks: “How could the SLPA sign contracts with Chinese suppliers and contractors even before the loan agreement was signed?” 

Sarvananthan points out that the 6.3% interest charged on the first agreement dated October 30, 2007 for a loan of US$ 307 million, and 6.5% interest charged on the second agreement dated August 6, 2009, for a loan of US$ 65 million for the Hambantota port by the Exim Bank of China were “exorbitant” given the fact that the effective LIBOR (London Inter-Bank Offered Rate) was much lower (just 2% in 2009). 

He further says that the Chinese lender’s “huge upward revision of the interest rate (from 2.0% to 6.3%) on the very first loan for the HIP in 2007-2008 after the signing of the formal contract between the borrower and the lender could be construed as a predatory practice.”

Predatory Lending  
Sarvananthan defines predatory lending as lending with “severe conditions”. These can be aggressive sales/lobbying tactics, very high-interest rates (usually 3-digit interest rates), overcharging for administrative costs, non-disclosure of risk factors by the lender, failure to carry out due diligence with regard to the technical feasibility and/or financial viability of a particular project, or very high collateral requirement, a very stringent penalty in the event of default, or a combination of the foregoing.”  

Failing to carry out due diligence with regard to the financial viability/commercial potential of most of the projects funded by China in Sri Lanka, would also fall in that category, Sarvananthan says. Due diligence was lacking in the case of the Hambantota port, the Mattala airport and Colombo Lotus Tower. Sri Lanka’s capacity to repay was also not factored in, he points out. 

Dubious Cancellations 
The Jaffna-based economist considers the abrupt and arbitrary cancellation of the Japan International Cooperation Agency (JICA) funded US$ 1.6 billion Light Rail (LRT) project in Colombo in 2020 to be dubious. Sarvananthan points out that immediately after the cancellation of the LRT project in January 2020, the China Harbour Engineering Corporation (CHEC) was given the contract to build an elevated highway connecting the Colombo Port City and Thalawathugoda (replacing the proposed LRT system) without calling for open tender. 

“This is a classic case of project grabbing by Chinese state-owned companies and predatory lending by Chinese state-owned financial institutions,” Sarvananthan asserts.

Similarly, the East Container Terminal (ECT) of the Colombo port was to be developed jointly by India, Japan, and John Keels Holdings) as per a trilateral agreement signed in 2017.  But this was abruptly abrogated by the government in 2021 with the purported view to developing it entirely by the SLPA. However, in January 2022, it was reported that the ECT is to be jointly developed by CHEC in partnership with a local company, Access Engineering, Sarvananthan says.     

Citing another example, the Lankan economist says that Sri Lanka bought Sinovac COVID-19 vaccines in June 2021 from China due to the delay in receiving the second dose of AstraZeneca COVID-19 vaccines from India. There were allegations in the media that the Ministry of Health was paying a higher price to purchase Sinovac from China than the price paid to AstraZeneca from India. 

“When a journalist requested the Ministry of Health to disclose the purchase price of Sinovac, it refused to disclose the price because of a gagging agreement between the Chinese Embassy in Colombo and the local company involved in the purchase on behalf of the Ministry of Health. It was reported that the Chinese Embassy in Colombo had informed the Ministry of Health that if the purchase price was made public, the order will be cancelled, ostensibly because of a ‘special price’ offered to Sri Lanka,” Sarvananthan says.  

“It is this kind of non-transparency in the official business dealings between China and Sri Lanka that leads to accusations of predatory practices,” he observes.    

Why Quasi-Predatory?
However, Sarvananthan prefers to consider Chinese loans to be “quasi-predatory” rather than “predatory” because the Chinese lenders (the two major ones are the China EXIM Bank and China Development Bank) “cannot be accused of charging very high-interest rates.” He says that the “interest rates of Chinese lending have been always in single-digit and lower than the interest rates charged by private international capital market lenders.” The low-interest rates had tempered the effects of predatory practices.