Cut Down the High Interest Rate of Chinese Loan to Sri Lanka A Policy Proposal Concerning the Debt Crisis of Sri Lanka under the One Belt One Road SEIS 1603 Li Zhiliu2017/12/31 AbstractIn the backdrop of the One Belt One Road initiative (OBOR), China has incessantly escalated massive foreign direct investment (FDI) that includes infrastructure projects in Sri Lanka by loans at a high interest rate. Yet with poor performance on exports and an inability to pay off interests, Sri Lanka is so caught up in the middle of a nasty debt crisis that it ended up leasing its port to China despite internal concerns sparked about sovereignty. Suspicion and animosity against China have already started to surface, which inevitably hurts China in terms of Sino-Lanka bilateral relations, geopolitics, and the implementation of OBOR. Through examination and analysis, this policy proposal proposes that China should cut down the high interest rate of loans to Sri Lanka in an effort to guarantee long-term national interests. IntroductionIn December 2017, Sri Lanka officially executed the contentious deal signed in July in which China would hold 70-percent equity stake at Hambantota port for 99 years. The port deal was signed in 2014 between Chinese President Xi Jinping and then President of Sri Lanka Mahendra Rajapaksa, serving as a strategically essential spot in the “Silk Maritime Road” initiated by Xi’s administration. Hambantota, located in southern Sri Lanka, though underdeveloped so far, is regarded as a solution to alleviating transportation pressure of oil, fuel and other assorted facilities. It should have been a commercially prosperous port from which Sri Lanka government could make big money. Nonetheless, the present outcome backfires: The port has been at severe “under-capacity” along with its other infrastructures underutilized. At the end of the day, leasing the port to China is the only viable option to wipe out the $1.12 billion debt invested into the deep-water port by converting the debt into equity and actual control. Sri Lanka is indeed having a hard time dealing with enormous amounts of external debt. From July 2014 to July 2017, external debt constantly shots up. In July 2017, external debt exceeded $1 million. Since 2008, virtually every year except 2012, the government debt has been equivalent to over 70-percent of Gross Domestic Production (GDP). The government has expended countless money into paying off these debts. The official estimation states that Sri Lanka is presently burdened by $64.9 billion, out of which $8 billion is owed to China, derived from Chinese company’s magnificent investment. It is reported that 95.4% of entire government revenues have to go to debt repayment. Even the Sri Lanka prime minister conceded his lack of knowledge of the exact debt number. The unprecedentedly mounting debts have a long time coming. It was when President Rajapaksa was in office that Sri Lanka embraced Chinese company’s presence in local infrastructure projects and took the money loaned by China for fostering economic growth. Sri Lanka has been actively responding to OBOR which aims to amplify Chinese regional leadership through various economic activities, including investing huge amounts of money into local construction by giving loans. However, with such a small country like Sri Lanka where the economy are vulnerable to large-scale commercial loans at a high interest rate, it is virtually doomed for Sri Lanka to be mired down in the financial dilemma. Why did Sri Lanka still take the high interest rate loans even if fully aware of its potentially subsequently malign repercussions and to what extent the interest rate could be rated high? Why does the debt crisis intensify the tension between China and Sri Lanka? And ultimately, how can OBOR be crippled because of all of this? The answers to these questions will eventually lead to the conclusion, which is the policy I am here to propose, that China is supposed to cut down the high interest rate of loans that Sri Lanka is currently struggling to repay so that our long-term national interests can be secured and stabilized. How the Debt AccumulatesWhen the former President Rajapaksa took office, his priority was to end the traumatically lasting civil war between the government and the Liberation Tigers of Tamil Elam (LTTE), an ethnic minority separatist movement that had been inflicting upon Sri Lanka over decades. At that time, China lent a helping hand by gratis giving money and military assistance to combat the domestic terrorism, and even shielded Sri Lanka from international accusations of non-humanitarianism with respect to civilian death, by invoking its UN Security Council privilege. After the civil war eventually ended in 2009, Rajapaksa gave tremendous credit to Chinese endeavors and it was at that time that the Sino-Lanka relations experienced a radical transformation. Instead of being curbed by India to stay away from China, Rajapaksa elevated bilateral ties to an all-time high level and welcomed Chinese investment, signing one deal after another and making business with Chinese firms. On the one hand, Sri Lanka yearned to recover from warfare, urgently in need of economic boom. On the other, it perfectly echoed with Chinese President Xi’s agenda of initiating OBOR. Under OBOR, the primary scheme is that China will issue loans to countries where infrastructure investments are needed. The question is: Is interest rate of Chinese loan really high? Answer: Yes. Sri Lanka takes out a loan from China at a commercial interest rate of 6.3%. In contrast, the interest rates on soft loans from the World Bank and the Asian Development Bank (ADB) are merely 0.25–3%. Interest rates of India’s Line of Credit to the adjacent countries are as low as 1%, or even less, in some scenarios. However, as Sri Lanka joined the list of middle-income countries, it was deprived of right to take out concessionary loans of which interest rate remained low. Hence, Sri Lanka had to resort to Chinese commercial loans despite high interest rates. It is also noteworthy that Chinese loans were preferred because they did not entail extra conditions regarding human rights, democracy and governance. Given how costly an infrastructure project could be, it is no surprise that a tremendous amount of money has to go to debt repayment if it is added with interests. Yet a country of poor economy, like Sri Lanka where export falters, may find it particularly unmanageable to service its debt especially when the project is not as profitable as predicted. The ultimate outcome is a staggering debt number. Why the Interest Rate Needs Cutting Down·Sri Lanka Devastated in Debt, Sino-Lanka Relations DeteriorateBack in 2014, IMF had warned Sri Lanka of potential dangers when it was transitioning from concessionary loans to more expensive commercial ones given its low tax revenues.