Hussein Askary (Belt and Road Institute in Sweden)
Victoria Nuland, U.S. State Department Under Secretary for Public Affairs visited Sri Lanka this week, where she capitalized on the financial crisis of the Asian country to launch an unfounded offensive against China. In a similar manner to U.S. Treasury Secretary Janet Yellen’s visit to Zambia, the issue which was raised was China’s alleged unwillingness to support Washington’s efforts to solve the financial and debt crisis in many African and Asian nations. The new narrative being pushed by these U.S. officials is not the debunked “China debt-trap” narrative but that China is not cooperating to relief the debt of these poor, suffering nations!
Reporting on Nuland’s visit to Sri Lanka, Reuters wrote that “the United States wants China to provide credible and specific assurances to the International Monetary Fund (IMF) along with other creditors to help Sri Lanka unlock a $2.9 billion bailout, a senior U.S. diplomat said on Wednesday.. Sri Lanka entered into a staff level agreement with the global lender last September but needs financing assurances from key bilateral lenders China and Japan before disbursements can begin.” (emphasis added). Mrs. Nuland is quoted as saying that “what China has offered so far is not enough”, adding that the U.S. side “need to see credible and specific assurances that they will meet the IMF standard of debt relief.”
There are several fallacies in these statements.
First of all, magnifying the Chinese role is absurd, since Sri Lanka’s debt obligations to China are a mere 10% of the total external debt of the country, as we revealed in a groundbreaking report on the Sri Lankan debt crisis in June 2022, while Western private bond holders such as American investment fund BlackRock and British Ashmore hold 47%, Japan-based Asian Development Bank 13%, Japan 10%, the World Bank (9%), and the Paris Club and other multilateral and bilateral lenders, including India, hold 12% of the external debt of Sri Lanka. So, 90% of Sri Lanka’s debt belongs to Western or pro-western institutions and but the emphasis is made on China’s 10%, which reveals the absurdity of the allegations.
Second, the Chinese Export-Import Bank has reportedly announced that it will issue a debt moratorium for Sri Lank for two years, meaning that the Sri Lankan government will not have to pay neither the principal nor interests for the years 2022 and 2023 of the US$ 3,8 billion owed to the EX-IM Bank by Sri Lanka. The EX-IM bank is the single largest Chinese lender to Sri Lanka for infrastructure projects.
Third, the real elephant in the room but not being noticed is not seen, is what to do with the short-term, high-interest loans of the Western private creditors. China’s debt is long-term, low interest, and is directed to improving the real economy of Sri Lanka.
Real story 1: bail out Western bond holders!
The IMF’s “staff level agreement”, referenced by Mrs. Nuland, was very clear in stressing that the country must make a settlement of its debt to international private sovereign bond holders, before the IMF extends any assistance to the country. “Financing assurances to restore debt sustainability from Sri Lanka’s official creditors and making a good faith effort to reach a collaborative agreement with private creditors are crucial before the IMF can provide financial support to Sri Lanka,” said the IMF Staff report after visiting Sri Lanka last September (emphasis added).
As in the case of U.S. Treasury Secretary Janet Yellen’s demanding that China bail out Zambia’s creditors, Nuland will most likely face the same response from China regarding Sri Lanka, that China has its own bilateral mechanisms for debt-relief with such countries in distress.
Yellen, before leaving Davos, Switzerland, to Africa made a statement whose credibility was very doubtful, saying that Chinese Vice-Premier Liu He, assured her during their talks in Davos of China’s support to the U.S. efforts. But the Chinese embassy in Lusaka, the Capital of Zambia, issued a very sharp statement the day Yellen arrived, debunking these statements and scolding the U.S. for contributing to the financial and debt crisis in the world through its inflationary policies and raising of interest rates. The embassy’s statement basically stated that the U.S. should worry about its own debt crisis, which has raised U.S. debt to 31 trillion dollars, making it is a disadvantageous position to dictate how other nations should solve their own problems. China, the statement stressed, is contributing to debt relief and restructuring bilaterally and through well-known processes, such as the Zambia’s Official Creditor’s Committee under the G20 Common Framework.
Real story 2: Keep China out!
It has become clear in the case of Zambia that the second goal of the U.S. drive in collusion with U.S. and Western-controlled IMF is to undermine China’s development cooperation with African and other developing nations under the umbrella of the Belt and Road Initiative (BRI).
The most important results of the agreement between the IMF and Zambia’s government to get a zero-interest loan of $1.3 billion with a grace period of five-and-a-half years, and a final maturity of 10 years, was indicated in the reports of the IMF staff. To receive the financial support Zambia had to accept specific conditionalities to reduce government spending, but most emphatically to stop borrowing for infrastructure projects.
The IMF staff report in September 2022 stated clearly: “Zambia is dealing with large fiscal and external imbalances resulting from years of economic mismanagement, especially an overly ambitious public investment drive that did not yield any significant boost to growth or revenues.”, it asserts also that “rapid debt accumulation on the backdrop of deteriorating economic fundamentals has led to unsustainable debt levels and subsequent accumulation of arrears. Debt contracted has mainly been for infrastructure projects in sectors such as roads, education, health and defense.” (emphasis added) This is outright sophistry, since the most poisonous part of the debt was accumulated through borrowing in the global bond markets from mainly British and American sources. China’s credits were long term and focused on improving the physical economy and productivity of Zambia.
The other elephant in the room, as we reported in a previous article on Zambia, is that almost all of the natural wealth of the country, mainly copper and cobalt, is controlled, produced, and shipped abroad by British companies that given next to nothing back to the Zambian economy. This point is never taken up in the international discussion about the financial and economic woes of countries like Zambia.
Mixing apples and poisonous mushrooms
It is one of the tragedies of our time that one needs to convince economists, policymakers and think tankers, that building modern infrastructure, such as roads, railroads, ports, airports, power plants, water and sewage systems, hospitals and schools, is necessary for alleviating poverty and developing an economy. This is unfortunately no longer a self-evident conclusion. Listening to Western leaders, economic experts, IMF and World Bank staff saying that nations who cannot afford to build infrastructure should not build infrastructure, is no longer considered a mindboggling and absurd statement. Build Back Better World (B3W), which was launched as a G-7 alternative to the BRI makes this intention very clear, that there will be no economic development in financially distressed nations. It is called “fiscal sustainability”, i.e., if you cannot afford modern health care, you should not think about modern health care. Besides, never think about borrowing from China to build modern hospitals! (Read our assessment of B3W and why the BRI is irreplaceable!)
The government of Sri Lanka has been plagued by persistent fiscal deficits for decades, compelling the government to perpetually borrow from both domestic and foreign markets and accumulate public debt. These loans are not taken to build productive projects, but to relief short term emergencies. As a result, a large fraction of government revenue and foreign currency inflows to the country are required to be channeled for debt service payments, permitting little leeway for productive investments. Then the IMF and other institutions come forward with new packages with strings of massive austerity measures attached to them. This is the poisonous mushrooms that many nations are forced to eat in times of crisis. Real economic development and increasing the productivity of the Sri Lankan economy hold the key to the solution. But this requires great investments in infrastructure, industrialization, and the modernization of the agricultural sector. This is where you get the sweet apples at the end of the day.
China’s credits are long-term and dedicated to infrastructure building which help nations increase their productivity. Western credits are extended to these nations in times of crisis to fill fiscal and financial gaps (including paying old debt) which just make the debt-trap tighter without raising the productivity of the nation.
The most amusing irony during Yellen’s visit was that she landed in the new terminal at Kenneth Kaunda Airport in Lusaka which was just built by China, financed by an Exim Bank of China loan and designed and built by China Jiangxi Corporation for International Economic and Technical Cooperation. The Chinese company has also renovated the whole airport, including the old terminal, raising the capacity of the airport for handling passengers from two million to four million passengers per year.
It is not clear if Mrs. Nuland visited the Colombo Port being developed by China to become one of the most vital ports and economic zones in the Indian Ocean.