Seven years after the China-built Hambantota Port was inaugurated with great fanfare by the then president of Sri Lanka, Mahinda Rajapaksa, as a symbol of his country’s rising geopolitical aspirations in Asia, the Sri Lanka government has taken the project to its logical and inevitable, if not the aspirational, conclusion. It has handed it over to a state-run Chinese company, China Merchants Port Holdings. Prime Minister Ranil Wickremesinghe had explained to the country in 2016 that he had to do this because it had become a “white elephant”. Any person with a reasonable understanding of how loans and interest rates work could have predicted this, and indeed, many did. But Rajapaksa, then, was a leader blinded by his military victory, Sinhala majoritarian chauvinism, and a need to cock a snook at its human rights talks, because he had China on his side.
China’s Exim Bank loaned 85 per cent of the finances for the $ 1.5 billion port, at an interest of 6.5 per cent. The balance was put up by the Sri Lankan government, which borrowed heavily from other sources for it. The first phase, which Rajapaksa inaugurated in 2010, one year after winning the war against the LTTE, comprised four berths and buildings and cost about $ 650 million. The repayment amounted to $ 60 million annually. The port, which began operations in November 2011, had to start making money by 2013, in order for Sri Lanka to be able to repay the loan. However, by 2016-end, the government estimated its cumulative losses at $ 3 billion.
How this goes down politically in Sri Lanka will become clear soon. The same Rajapaksa, who mortgaged the country’s finances to China, is questioning this government’s decision, which includes also handing over a large tract of land close to the port to Chinese companies for a special economic zone. For the region, though, Hambantota should be a lesson on big ticket infrastructure projects with loans from their patron countries at market rates. From before the signing of the agreement for handing over Hambantota, Pakistani economists have been raising red flags about the China-Pakistan Economic Corridor. But if countries are still happy to walk into these traps, it has to be because they are seeking to position themselves in the world or in a region, hoping at the same time to reap some political dividends at home.
Nothing else explains the recent decision by the Maldives, whose main economic products are tuna and tourism, and which is in the world’s doghouse for its government’s increasingly authoritarian tendencies, to sign a Free Trade Agreement with China. Last heard, Sri Lanka, which has been railing against a Comprehensive Economic Partnership Agreement with India, is negotiating an FTA with China. For the record, the agreement to hand over Hambantota to China was signed on July 29, 2017, exactly 30 years after the India-Sri Lanka Accord.