Welcome China, welcome debt-based growth
View(s):During the 1950s, 1960s and, to some extent in the 1970s, lining up the roads waving flags to greet a world leader was a spontaneous reaction by Ceylonese (now Sri Lankans) as a show of respect ,affection and an acknowledgement by all that it is a plus for the country. Local leaders at that point had the country’s interest (at least, largely) at heart.
Today, it’s a different ballgame. Either the ‘game’ (environment) has changed or visits of this nature are more a promotion of one’s own (leaders’) political interests and political future. Our minds go back to those good, clean, old days when children, dressed in white shorts and shirt, eagerly waited for the ‘revered’ visitor. It was a fun occasion, a proud occasion for a school to be picked by the state for this event; there was no rush, no pushing and prodding, no forced appearance.
These thoughts came to mind reading a recent complaint by the Ceylon Teachers Union that parents were forced to pay for uniforms and other costs when their children lined the streets this week to greet Chinese President Xi Jinping.
Be that as it may, the Chinese President’s visit and the visit earlier of the Japanese Prime Minister Shinzo Abe is welcome and gives an indication of the importance that these countries attach to relations with Sri Lanka. Both were high-powered visits, the first by a Chinese President in three decades, and accompanied by business delegations. It also led to visits by heads of Chinese business groups doing business with local entities, in a catch-up and further-business process.
China and Japan have long, established relations with this country under different administrations dating to the time of the Rubber-Rice pact with the Chinese in 1952 (Ceylon rubber in exchange for Chinese rice) and J.R. Jayewardene (then Finance Minister) defending Japan at a 1951 global conference on a crucial peace treaty between Japan and the allied forces. Japan still respects Sri Lanka for that gesture and the Sri Jayewardenepura Teaching Hospital ,Rupavihini television station were gifts from Japan to honour JRJ and Sri Lanka’s support in a time of crisis. Earlier, the Chinese built the majestic Bandaranaike Memorial International Conference Hall (BMICH) as a gift for the 1976 Non Aligned Summit.
Today, these visits take a different turn and are connected to global politics with support through massive loans at slightly below commercial interest rates. Development, they say, comes at a price but is it affordable, is the question asked by many. Most economists agree that Sri Lanka is more vulnerable to foreign debt today than ever before as foreign loans and borrowings rise sharply. The figures are well known, undisputable and available in the public domain. Search for ‘Sri Lanka debt’ on the net and the data pops up. A sizable chunk of Sri Lanka’s annual (budgeted) revenue goes for foreign debt interest payments.
China’s current and larger role here emerged in around 2005 when the latter came to Sri Lanka’s rescue since others (mostly the western bloc) had turned away assistance complaining of human rights violations as fighting escalated between the armed forces and the LTTE.
In such a situation, the Government needed a reliable partner for development, turning to China who willingly stepped in. Apart from the hard infrastructure – ports, roads and the power sector, there is also soft infrastructure like the arts theater (Nelum Pokuna) and upcoming Lotus Tower. Moving up the development ladder (in terms of overseas financial support) comes at another price: Sri Lanka is now a middle-income country which makes it ineligible to grants (free money) or cheaper credit from lending agencies.
While certain projects funded by the Chinese like the Hambantota harbour and the port will not see any short term return or faster ROI (return on investment via loans), highway and road development brings faster returns. China’s financial support is a mix bag for Sri Lanka.
The Southern and Katunayake expressways were long-delayed projects and should have happened a long time ago. That it has eventually happened is certainly, and without a doubt, a forward step by the authorities. Such projects have seen a trickle-down effect. Towns where there are access points to the Southern Highway like Welipenna and Bandaragama for example see progress, faster connectivity and real estate prices rising; people’s benefits. The same applies to Jaela (vis-à-vis the Katunayake highway) which has become a thriving suburb, increased land prices and provided new options for people who prefer living away from a noisy and smoky Colombo and commuting to the capital.
In today’s politics games, any ruling party would look at short term gains and push development that is visible for the people – highways, theatres, malls, towers, beautiful cities, etc are symbols of development; that’s a given.
The downside however is that to pay back these loans, the people are called up to pay increased taxes. Thus more money in the hands of people benefiting from development is offset by higher taxes.
China’s support of Sri Lanka in terms of billions of rupees worth of development is therefore welcome but (as stated earlier) comes with strings attached – loan repayments and new geopolitical ramifications.
The cycle of debt payments will continue over many generations. There’s unlikely to be a time when Sri Lanka would be debt free, for, while one debt ends (interest and capital repayments), another debt emerges. Furthermore, borrowings and debt are growing amongst Sri Lankans (like the rest of the world) as the credit card ‘buy-more-than-you-earn’ culture takes over. Debt is today’s buzzword – positive for many without instant cash!
Rising debt inevitably results in the authorities’ fire fighting on the revenue side, rushing through new taxes or revenue-loss measures like this week’s reduction in fuel and power rates. Policy inconsistencies like this are not good for business or potential foreign investment.
So Sri Lankans will pay a high price for high-profile visits of this nature. Whether the eventual return is worth the price, will only be known many, many years later when the repayment becomes the ‘burden’ of coming generations.