Did China "Seize" Sri Lanka's Hambantota Port for Unpaid Debt?

Africans have been leery about Chinese loans ever since an Indian polemicist coined the term “debt trap diplomacy” to describe the sale of 70% of the shares of Sri Lanka’s Hambantota port to a Chinese company– a highly politicized Sri Lankan investment seen by some as a white elephant, and by others as an important future commercial asset that was developed prematurely, given its original feasibility timeline.

Now The Economist has mis-characterized my analysis of Hambantota in a June 29, 2019 story, “China is Thinking Twice About Lending to Africa,” by suggesting that I examined 3000 projects and found that Hambantota “was the only example of such an asset being seized to cover a debt.”

This is not what I argued. I wrote in The American Interest that Hambantota is the only example “that has ever been used as evidence” for this accusation. But even this example does not support the claim.

Some recent reports, including one by the Rhodium Group, described Hambantota as an “asset seizure” by China in response to debt problems related to the port. This is not how I and other researchers who have examined this case closely see Hambantota.

The port was clearly troubled, although much of this can be attributed to Sri Lanka’s domestic politics. But the important point is that it was not Hambantota’s loans that were pressing on the Sri Lanka government. It was international sovereign bond payments. Two thirds of the Hambantota loans were at a fixed rate of 2 percent, with a five year grace period, while one early loan for the first phase, at $307 million, was at a fixed rate of 6.3%. These rates were far lower than Sri Lanka’s commercial borrowings from bond markets.

As one analyst notes:

Although Hambantota port was leased to CM Port, the loans obtained to construct Hambanota port were not written off and the government is still committed to loan repayments as per the original agreements. The money obtained through leasing Hambantota port was used to strengthen Sri Lanka’s dollar reserves in 2017-18, particularly in light of the huge external debt servicing due to the maturity of international sovereign bonds in early 2019. 

Privatizing 70% of Hambantota to CM Ports for $1.1 billion was one way in which foreign exchange could be brought into the country, allowing a balance of payments crisis to be staved off. It was not an asset seizure.