Trapped in the Dragon's Debt: How China's Global Ambitions are Pushing Developing Countries towards Financial Ruin"

Sri Lanka has become a cautionary tale of misgovernment and misfortune to the rest of the world. The country's economic troubles stemmed from a combination of factors, including the profligacy of the Rajapaksa brothers and a misguided plan to convert the nation's farming industry into a solely organic enterprise. These factors collided with external shocks such as the pandemic, which severely impacted Sri Lanka's vital tourism sector, and the Russian invasion of Ukraine, which disrupted global supply chains and accelerated inflation, dragging Sri Lanka's economy into the abyss. China's role in Sri Lanka's economic crisis has been significant, as Beijing is the country's largest creditor, accounting for approximately 10% of its foreign debt. Over the past two decades, China has extended nearly $12 billion in loans to the Sri Lankan government for various infrastructure projects, many of which have become white elephants. Sri Lanka recognized that it could no longer pay off the loans, and as a result, ceded control of the costly port facility in Hambantota, the Rajapaksas' hometown, to China half a decade ago.

Experts warn that other debt-ridden countries such as Laos and Kenya may be heading toward a similar fate. During meetings of the Group of 20 finance ministers, International Monetary Fund (IMF) Managing Director Kristalina Georgieva cautioned that countries with high debt levels and limited policy space would face additional strains and urged caution, citing Sri Lanka as a warning sign.

Chinese state banks have invested heavily in the developing world, becoming the de facto creditor for many countries. However, in recent years, these banks have shifted their focus to debt collecting due to a slowing economy in China. Despite this, Sri Lanka has been accused of walking into China's "debt trap" diplomacy. In 2020, Sri Lanka received $3 billion in easy credit from China to repay its existing debts, rather than restructuring its debts through dialogue with the IMF and implementing austerity measures to appease the Paris Club, the group of 22 rich nations that are the world's major creditors. China is not a member of the Paris Club, reflecting its own geopolitical ambitions and reluctance to follow rules set by other powers.

Alan Keenan of the International Crisis Group argues that while Sri Lanka has other creditors, including India and Japan, China's engagement with the country has been more noticeable and troublesome. Other debt-laden countries are also dealing with the ramifications of significant loans from Chinese state banks. For example, China's funding for infrastructure projects in Zambia and Laos have put these countries at risk of defaulting on their debts. Chinese officials and state commentators reject Western criticism of their practices, dismissing it as colonial paternalism. The state-controlled Global Times responded to criticism of China's role in Laos by claiming that the Western world resents any beneficial co-operation between China and other countries.