The purpose of this response is, firstly, to pinpoint the factual errors (both quantitative and qualitative) in Moramudali and Panduwawala (2022), and, secondly, to contest the “reality” the authors are attempting to illustrate with such studious endeavour.
However, more than the factual errors (both quantitative and qualitative), our main concern here is the interpretation of the facts and the conclusions drawn therefrom by Moramudali and Panduwawala (2022). Moreover, we will be pointing out certain instances where Moramudali and Panduwawala (2022) contradict themselves by demolishing and also affirming the so-called “myths” (“hidden debt”, for instance) in different places in the same Briefing Paper. The peer reviewer/s (if there were any) seem to have not noted these contradictions or anomalies.
A Factual Check
Moramudali and Panduwawala (2022) estimate that the total outstanding Chinese loans to Sri Lanka at the end of 2021 were US$ 7.4 billion out of a total “US$ 37.6 billion” of the external public debt of Sri Lanka (excluding the CBSL debt) as at the end of 2021. They estimate the Chinese loans to be 20% of the total external public debt of Sri Lanka at the end of 2021.
However, according to our estimate based on the Quarterly Debt Bulletin of the Ministry of Finance , the total outstanding publicly-owned foreign currency liabilities of Sri Lanka were almost US$ 46 billion as of September 30, 2022. If we assume that Moramudali and Panduwawala’s estimate of the outstanding Chinese loans to Sri Lanka (US$ 7.4 b) is correct, then the share of China in Sri Lanka’s total outstanding external liabilities was 16% as of September 30, 2022, according to our estimate.
Due to brevity of space, the details of factual errors (including the data tables) are not included in this blog post. Please read the full rejoinder for the details. https://docs.google.com/document/d/1quL7XFT0Xeo5J1S8Iw3wyscqZx0NN6C6aoG300aBuEc/edit
A Reality Check
Our main concern in the Briefing Paper by Moramudali and Panduwawala (2022) is about the erroneous interpretation/s of the data and the conclusion/s drawn.
“We found no deliberately ‘hidden debt’ in China’s lending to Sri Lanka’s public sector …”
It does not really matter whether China accounts for 20% of the total outstanding external public debt of Sri Lanka, or 16% of the total outstanding external liabilities of Sri Lanka as we have estimated, or any other percentage. The foregoing claim is of interest to us.
The real issue for us is whether the Chinese lending to Sri Lanka during 2007-2022 is predatory or not. It is on this issue that we contest the conclusions arrived at by Moramudali and Panduwawala that classifying the leasing of the Hambantota International Port (built at a total cost of US4 1.3 billion ) to a Chinese state-owned company as an “asset seizure” or “debt-for-equity swap” is a “myth” (see the following quoted passage). Moramudali and Panduwawala’s attempt to “firmly separate myth from reality” is what is contentious to this author.
“……. the 99-year lease of the (Hambantota) port in 2017 was a measure to address severe balance of payments issues, ...... The lease proceeds helped improve foreign currency reserves and there was no debt-to-equity swap nor an asset seizure, contrary to popular narrative.”
We agree with Moramudali and Panduwawala (2022) that, in a strictly legal sense the leasing of the Hambantota International Port (HIP) to a Chinese state-owned company in 2017 was not an “asset seizure” nor a “debt-to-equity swap’. It is not an asset seizure because the port was never made collateral for the loans from the China Exim Bank (China Export-Import Bank, aka ChEXIM) to build and subsequently expand the port. Asset seizure occurs only when the borrower had mortgaged the particular (immovable) asset as collateral for the loan/s obtained to build or expand. Usually, there is no collateral involved in any borrowings by a sovereign country.
Besides, it is not a “debt-to-equity swap” either, because the money received for granting 85% of the equity stake to the China Harbour Group (CHG - a state-owned company) in 2017 was not utilised to repay the loans borrowed for the purpose of building and expansion of the port. As Moramudali and Panduwawala (2022: 2, & 16) have revealed, the money received for the lease was utilised as “…. a measure to address severe balance of payments issues….”, which we assume to have been used to repay one or more of the then maturing International Sovereign Bonds (ISBs).
Moramudali and Panduwawala (2022: 9) further claim that all the loans obtained from China for the building and expansion of the Hambantota International Port (HIP) are still being serviced by the Treasury of Sri Lanka, having taken over the loans from the balance sheet of the Sri Lanka Ports Authority (SLPA – a state-owned enterprise) in 2017. Between 2013-2017, HIP loans were included in the balance sheet of the SLPA as a NON-GUARANTEED foreign loan of the SLPA. This indeed was a classic example of a “hidden debt” , which Moramudali and Panduwawala (2002: 2) painstakingly deny. It does not really matter whether it was hidden by the Government of Sri Lanka (GoSL) or the lender (Chinese financial institution). Both have an international obligation to be transparent.
Whilst Moramudali and Panduwawala (2002: 17) confess that “The Auditor General noted that the outstanding balance of four ChEXIM loans for Hambantota port construction were not recorded in the government’s outstanding debt stock. While debt repayments were made on time by the Treasury and tracked by the ERD, outstanding loan amounts were not recorded by the SLPA or the Treasury in annual balance sheets.”, how could they assert that, “We found no deliberately ‘hidden debt’ in China’s lending to Sri Lanka’s public sector.”
Further, whilst Moramudali and Panduwawala (2022: 2) at the outset deny there was any “hidden debt” in Chinese lending, later on, they also confess that “………there was indeed a portion of Chinese lending to Sri Lanka’s public sector that is apparently ‘hidden’ due to the complexities of debt classification and inconsistency of reporting standards across various public institutions and reports, especially with regards to debt recorded under SOEs. But in reality, they are not ‘hidden’ because at least some public institutions were reporting on these loans in publicly available reports and in data easily obtainable via RTI requests.”
Obtaining information through an application in terms of the RTI Act is not what a transparent borrower and lender should impose on the citizens or any other interested party. Proactive disclosure of the information is the norm among the Development Assistance Committee (DAC) countries of the OECD.
To this author, the utilisation of the proceeds of the leasing of the HIP to augment the balance-of-payments or for the repayment of a maturing ISB/s is a dubious accounting practice of the Government of Sri Lanka (GoSL) and a gross violation of the International Public Sector Accounting Standards (IPSAS, 2002) of an accountable democratic state.
This is where the Chinese lender (EXIM Bank of China) has also erred. If it is indeed a responsible and accountable state-owned lender of the world’s second-largest economy, the EXIM Bank of China should have insisted that the money paid by the China Harbour Group (CHG) to the Government of Sri Lanka for the acquisition of 85% equity stake in the HIP should be channelled to repay the loans obtained from the EXIM Bank of China to build and subsequently expand the HIP. We sincerely believe that, if the lender for the HIP was a state-owned bank from a DAC member bilateral donor, the foregoing dubious transaction by the GoSL would not have been allowed. Therefore, China cannot absolve itself from culpability in the foregoing dubious transaction and accounting practice of the GoSL.
It is precisely the accounting malpractice of the GoSL and the collusion of China in this dubious transaction that had led to accusations of “asset seizure” and “debt-to-equity swap”. This author has come across similar unethical (if not illegal) practices in the Chinese lending to Pakistan and to some African countries as well.
Secondly, 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 06, 2009, for a loan of US$ 65 million for the Hambantota International Port (HIP) by the Exim Bank of China were exorbitant (but may not be predatory) for an infrastructure project of the scale of the HIP. Moramudali and Panduwawala (2002: 6) have themselves admitted that the aforementioned interest rate/s were very high given that the effective LIBOR (London Inter-Bank Offered Rate – an average of interest rates of leading banks in London) rate was just 2% in 2009. However, we are aware that the first-ever International Sovereign Bond (ISB) floated by Sri Lanka in July 2007 incurred an 8.25% annual interest rate.
Quasi Predatory lending by China
We characterise the Chinese lending to Sri Lanka as ‘quasi predatory’. The rationale for this characterisation is as follows.
What is predatory lending?
Predatory lending in financial parlance could be defined as the imposition of unfair, arbitrary, and even abusive terms and conditions on the borrower by the lender. Both the borrower and lender can be individuals, institutions, or nation-states. Such severe conditions can be aggressive sales/lobbying tactics, very high-interest rates (usually 3-digit interest rates), overcharging for administrative cost/s, 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 (such as the Hambantota International Port or the Colombo Lotus Tower (1,150 feet or 350 metres) – the tallest communications tower in South Asia), very high collateral requirement, a very stringent penalty in the event of default, etc, or a combination of the foregoing.
Why do we term the Chinese lending to Sri Lanka quasi-predatory?
Whilst admitting that Chinese lenders (two major ones are the China EXIM Bank and China Development Bank) cannot be accused of charging very high interest rates (interest rates of Chinese lending have been always in single digit and lower than the interest rates charged by private international capital market lenders), excessive administration costs, or imposing very high penalty in the event of default, etc, with regard to its lending to Sri Lanka, to the best of our knowledge, China could be legitimately accused of failing to carry out due diligence with regard to the financial viability/commercial potential of most of the projects funded by it in Sri Lanka (including the Hambantota International Port (HIP), Mattala International Airport, Colombo Lotus Tower, etc) and Sri Lanka’s capacity to repay the corresponding borrowings (by way of an in-depth review of the assets and liabilities of the Sri Lanka Ports Authority, the original borrower for the HIP as noted by Moramudali and Panduwawala (2022), for example), and resorting to aggressive marketing/lobbying tactics amongst Sri Lankan political leaderships and bureaucrats.
In addition to the aforesaid failure of the Chinese lenders to take due diligence in the cases of funding prestige mega infrastructure projects (for example, HIP), Chinese state-owned infrastructure development companies operating in Sri Lanka for nearly 20 years now (such as China Harbour Engineering Corporation and China Harbour Group, for example) are alleged to be involved in aggressive lobbying for projects (even submitting unsolicited project proposals with suggestions for Chinese funding mechanisms) among the political leadership/s in power and senior bureaucrats. The foregoing are naturally predatory lending practices in financial parlance.
Additionally, Chinese state-owned companies could also be potentially involved in bribing politicians and/or bureaucrats in their host countries, which is termed “corrosive capital”. We would like to highlight three such concrete examples of abrasive/aggressive project grabbing by Chinese companies in Sri Lanka in the last few years (an elevated highway connecting the Colombo Port City and Thalawathugoda, Eastern Container Terminal at the Colombo International Port, and the elevated highway connecting the new Kelaniya bridge with Athurugiriya), and a concrete example of secrecy demanded by the Chinese Embassy in Sri Lanka with regard to the purchase of Sinovac COVID-19 vaccines by the Ministry of Health. Due to brevity of space we have deleted the details from this blog post, which can be read in the full rejoinder.
What the aforementioned concrete pieces of evidence point to is that, whilst Chinese lending may not be termed predatory lending (because of the absence of very high-interest rates on their lending and there is hardly any evidence of overcharging in terms of administrative cost/s, etc), Chinese lending could be reasonably characterised as quasi-predatory lending because of their lack of due diligence on project funding, and aggressive lobbying tactics with Sri Lankan politicians and bureaucrats.
Therefore, we would argue that Moramudali and Panduwawala’s characterisation that the accusations of asset seizure or a debt-for-equity swap by Chinese lenders with regard to the acquisition of an 85% equity stake on the HIP in 2017 are a “myth” appears to be an attempt to camouflage reality. It is precisely the aforementioned quasi-predatory practices by the Chinese state-owned companies and Chinese official lenders that elicit such accusations by investigative journalists and other concerned people, including some international development partners.
In sum, while we may characterise the borrowings by Sri Lanka through the floating of International Sovereign Bonds (ISBs) being similar to borrowing from individual money lenders in Sri Lanka, we may characterise the borrowings from China as being similar to the borrowings from microfinance institutions in Sri Lanka. The former could be characterised as predatory and the latter quasi-predatory.
Muttukrishna Sarvananthan is the Founder cum Principal Researcher of the Point Pedro Institute of Development (PPID), Point Pedro, Northern Province, Sri Lanka, established in 2004. The author is a Development Economist by profession. https://orcid.org/0000-0001-6443-0358 He has undertaken fiscal and monetary transparency reviews in Sri Lanka for Oxford Analytica, Oxford, UK, https://www.oxan.com/ from 2003 to 2006. Email: email@example.com