AbstractIn initiative (OBOR), China has incessantly escalated massive foreign

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.  IntroductionSri Lanka is now 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.

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 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. As a matter of fact, the unprecedentedly mounting debts have a long time coming.

It was when then President of Sri Lanka Mahendra 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 is 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 relentless 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 Jinping’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 the 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 a 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 only going to be a staggering debt number.

 Why the Interest Rate Needs Cutting Down·Sri Lanka in Dilemma, Sino-Lanka Relations DeteriorateSubstantial investments in the form of high-interest loans from China has engendered numerous problematic sequels and ratcheted up tensions of Sino-Lanka relations. It is believed that Chinese projects has bred worrying corruption because Chinese companies took advantage of corrupt regime by bribery so that they were able to avoid open competition. Environmental concerns of these investments are sparked as well.

 More importantly, the financial crisis is devastating the small country. Back 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. In 2015, it yet again suggested Sri Lanka “rationalize tax system and arrest growing inflation.” In early 2016, Sri Lanka was struck by a catastrophic economic downfall due to fiscal deficit and external debt burden.  The loans have ensnared Sri Lanka into the quandary and profoundly changed Lankan politics. The 2015 Sri Lanka presidential election culminated in the surprising victory of  Maithripala Sirisena, who remarkably made his criticism against China a hallmark of his campaign.

After taking office, he ordered to scrutinize and suspend some Chinese-funded projects, along with a modified pragmatic foreign policy that leaned toward India and US, all of which raised tensions between China and Sri Lanka. Such tensions unleash a dangerous signal for China and compel China to deal with those high-interest loans accordingly. This is because Sri Lanka is strategically indispensable to China. Its proximity to one of the busiest and most prosperous maritime road and to India demonstrates its significance. Moreover, since 2005 the bilateral economic relations have incredibly picked up, ranging from trade, investment to human resources. Sri Lanka is openly siding with China with regard to various issues in the international stage as well.

 With bilateral relations deteriorating, it is abundantly clear that an unaligned actor in the Indian Ocean is not in China’s interest. When interviewed, Sri Lankan Finance Minister Ravi Karunanayake desperately urged China to intervene to help them through, relaxing the debt by partially adjusting some of its terms. These high-interest loans have to be taken account seriously by Chinese top leadership. Cutting down the high-interest rate is the first principal policy that is able to ease Lankan financial difficulty.

 ·The Present SolutionHow did the current Sri Lankan administration handle the debt issue? They translated the debt into equity. In 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 President Xi and President Rajapaksa, serving as a strategically essential spot in the “Silk Maritime Road” proposed by Xi’s administration. Accordingly, the Export-Import Bank of China loaned $307 million in support of the construction fund. 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 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. Nonetheless, the lease deal provokes deep concerns about sovereignty and seems to make the situation go from bad to worse to some extent. Government critics hold that it is an erosion of sovereignty. Hambantota’s Member of Parliament (MP) Namal Rajapaksa chanted the slogan of “stop selling Sri Lanka”. In January 2017, protests erupted when the preliminary deal was being negotiated, as the terms had reminded the public of their colonial history under the British government.

The perceived image of China sank into a power of calculations and exploitation of small countries in the name of generous aid.  This should raise an alert to Chinese government as a warning sign, suggesting how the high-interest loans generate conflicts and, more critically, that a foreseeable pushback against OBOR might be occasioned. ·A Pushback against OBOREver since the fact that Sri Lanka would lease its strategic port to China due to onerous debt burden was disclosed, China and OBOR has been in the hub of public discourse internationally. China has drawn a great deal of criticism and the legitimacy of OBOR is being increasingly challenged. It is assumed that these massive loans that China currently gives are about to reinforce risks to global financial system.

 Furthermore, critics are emphatically suspicious that China is intentionally exploiting some countries’ inability to repay loans in order to gain geopolitical leverages. Sri Lanka, as they have cited, is a case in point. Brahma Chellaney portrayed Sri Lanka as the “victim” of Chinese “debt-trap diplomacy”. He accused China of “creditor imperialism”, comparing these loans taken out through OBOR to opium that were weaponized by British government to open up the market and manoeuvre China into its colonial domination in the 19th century.

 But let us be honest. This is not the first time that OBOR has come under fire, nor the first time that China is thrust upon the “China threat” narrative. However, once the adverse publicity is translated into concern, hesitation and pushback from countries that are engaged in OBOR, it should spur policymakers to adopt a new policy.

Bangladesh did not attend OBOR summit in May 2017 and Nepal downplayed its engagement at the summit, from the level of President to Deputy PM. This is not good news for China. As is known for a long time, OBOR is a global strategy of which the importance does not need further elaboration here. Its implementation not only matters to China’s foreign policy, but domestic economy at the same time. These signs of pushback demonstrate how the high-interest loans, as well as other problems with OBOR, of course, which are not the focus of my discussion here, constitute a barrier to greater influence of OBOR.

 Further JustificationsBefore I embark upon my justifications in defense of this proposed policy, I have to make it clear that the loans of which interest rate should be cut down refer to those that are going to be taken out from China as OBOR continuously unfolds in Sri Lanka in the future. It is the future loan that I am talking about. At first sight of the policy, it indeed seems like a peculiar proposal: Why should a lender cut down the interest rate when we are well aware of the borrower’s, Sri Lanka, incapability of repaying the loan? The policy is based on a solid assumption that China is still enthusiastic about investing in Sri Lanka and going to continuously give it a loan. Sri Lanka is too strategically irreplaceable to be given up despite a new administration taking over the reins. However, China still needs to compromise by cutting down these high-interest rates because Sino-Lanka relations are now being tested and OBOR are in question when the debts are draining Sri Lanka. It would leave China in the disadvantaged side in the Indian Ocean geopolitical competition if Sri Lanka holds back from OBOR or turns to India. Some might be curious whether there is a policy currently in motion.

The answer is simple: No. Notwithstanding Lankan efforts to appeal to China to adjust the terms, China has literally done nothing about the specific transactions. A policy vacuum emerges here.

No wonder at last it was Sri Lanka that stoke up the conversation of leasing the port since all the other options had been ruled out. In fact, there was a living precedent. Over years China provided loans at high-interest commercial rate to Venezuela out of strategical goal, which was akin to OBOR to some extent, that China were seeking friends in the Western Hemisphere. While Venezuelan economy collapsed, the proposition that the loans should be renegotiated was turned down by China. There might be concerns that whether cutting down the interest rate is an interference in business decision. Put it differently, is the interest rate really related to Chinese foreign policy? The fact is that the loans to Sri Lanka are all issued in the backdrop of OBOR, which is closely intertwined with Chinese global vision and foreign policy. Besides, China Merchants Port Holdings (CMPort), the company responsible for the construction of Hambantota port and now the management of it, is a state-owned enterprise.

 Also, the Export-Import Bank of China are also designated by the government to issue the loans to Sri Lanka. These all suggest that the infrastructure projects transcend ordinary scope of foreign investment, more representing official political-economy collaborations.  Anyone who tries to believe that cutting down the interest rate will incur loss for the Export-Import Bank of China disregards a fundamental principle: The priority of most Chinese foreign investments is not profit. In the context of Sri Lanka, this principle applies as well. The situation is not a matter of money in the first place. It is about how China establishes global leadership and gains geopolitical advantages through OBOR.

Otherwise, China would not give Sri Lanka another $24 billion in May 2017. There has been substantial investments worldwide made by China. It does not make sense if China only counts on the interests paid by Sri Lanka. The final question would be, if cut down, to which point the interest rate could be considered legitimate? As I have mentioned, the current interest rate of Chinese commercial loans to Sri Lanka is 6.3%, much more higher than that of OECD Development Assistance Committee (DAC) countries.

 As far as I am concerned, the appropriate interest rate could range from 2% to 4%. In sum, 6.3% is obviously too high to afford. ConclusionAs China continuously implements its ambitious OBOR, some of its problems should be identified and handled appropriately.

Of course, China is not to blame for the Lankan debt crisis since it was Sri Lanka that voluntarily asked for these loans. However, it is indisputable that the interest rate is high enough for Sri Lanka to repay. The deterioration of bilateral relations illustrates that debt-caused financial crisis has been an unavoidable issue standing in the way of bilateral progress and further cooperation. Meanwhile, the consequent pushback against OBOR in the South Asia is an alarming bell that has to be taken care of seriously.

 Cutting down the interest rate is one of the many policies that I believe should be carried out in order to address the problems of OBOR. More importantly, it is comparatively viable and easy to adopt. This measure is not an interference in business of the Export-Import Bank of China, nor is it a matter of money and profit. It is about Chinese sustainable leadership and a healthy OBOR implementation. This policy is going to restore harmony and trust between China and Sri Lanka, add Chinese weight in the Indian Ocean geopolitical game, and facilitate long-term sustainability of OBOR, all of which are in China’s national interest.