Sri Lanka’s external debt to China reached 9% of country’s GDP in 2021

China, a major provider of commercial loans to Sri Lanka has faced a dilemma in bailing out the island nation owing to claims that Sri Lanka fell into a debt trap due to infrastructure projects financed by China.

The external debt owed to China by Sri Lanka has tripled in recent years, according to Dr. Wignaraja Sri Lanka’s External debt to China accounts for 9% of Sri Lanka’s GDP in 2021, which represents a much bigger number than India.”

Dr. Wignaraja said the debt problem in Sri Lanka is not entirely made in China as majority of Sri Lanka’s debt was owed to Capital markets and private creditors. During the high level talks held in January this year Sri Lanka’s President sought Chinese Government’s support to help restructure Sri Lanka’s debt repayment. In addition, a swap arrangement with the People’s bank of China is currently under discussion.

“On one hand China doesn’t want to lose friendship as it knows the commercial opportunities accompanying it, however China worries that unilaterally granting Sri Lanka moratoria or debt restructuring will create a new precedent for its lending practices with other countries.

There is a whole queue of countries which are lining up to get assistance from China. Nevertheless China does not want to be hamstrung by its reputation of helping out a so called failed economy. That’s a very important reputational issue for China.”

Apart from that, China is facing a slowdown in its growth owing to rising C-19 cases. With this, China has become more preoccupied with looking inward.