Myths about the Hambantota Port Deal: The Diplomat

On 1 January 2020, Umesh Moramudali wrote an article in the Washington-DC-based The Diplomat on the myths surrounding Hambantota Port titled The Hambantota Port Deal: Myths and Realities.

Here is an excerpt from that article. 

Newly elected Sri Lankan President Gotabhaya Rajapaksa has raised concerns about the Hambantota Port lease agreement with China that was signed in 2017 by the previous government. Rajapaksa clarified that his government is not hoping to amend the commercial terms of the agreement.

The Hambantota Port deal is still widely cited to highlight China's "debt trap" phenomenon. It cannot be interpreted as a debt-equity swap or the Chinese cancelling debt in exchange for control of the port. In this case, there was no cancellation of the debt.

Instead, a 70 percent stake of the port was leased to China Merchants Port Holdings Company Limited (CM Port) for 99 years for $1.12 billion. 

At the time of entering into the lease agreement, Hambantota Port was valued at $1.4 billion and CM Port invested $1.12 billion as per the terms of the agreement.

A common and popular myth is that Sri Lanka was unable to pay off the loan obtained to construct the port, thus it was handed over to China. Some of the loans were obtained at interest rates as high as 6 percent while some were concessionary loans. The total sum of these loans amounted to $1.263 billion. 

The often-quoted "port deal" was actually a lease agreement clearly separate from the loans obtained for the purpose of constructing the port, not to repay China. Instead, it is more of a reflection of the external sector crisis Sri Lanka is facing.

Dr Dushni Weerakoon and Professor Sisira Jayasuriya also highlighted that Sri Lanka's debt problem is not caused by China — successive Sri Lankan governments borrowed from international markets despite the persistent fiscal and current account deficits, resulting in a vicious cycle when debt repayments came due. However, these facts do not justify the Mahinda Rajapaksa government's decision to construct the port using foreign loans obtained at higher interest rates. 

Although port operations started in 2011, following the completion of phase one of the project, Hambantota port was still incurring losses by 2016. The debt repayment now is the responsibility of the General Treasury, the revenue generated by the port is still a vital factor given the fiscal constraints of the government.