Hidden costs: The impact of foreign debt on Sri Lankan citizens

groundviews.org: The following is a response to a call for contributions ahead of the UN Independent Expert on foreign debt and human rights, Juan Pablo Bohoslavsky’s visit to Sri Lanka. Bohoslavsky is set to arrive in Sri Lanka from 3 to 11 September, at the invitation of the Government. His visit aims to assess the human rights situation from the standpoint of foreign debt and other related international financial obligations.

It is estimated that Sri Lanka’s debt servicing cost will be $ 4.2 billion next year. From 2000 to 2009, Sri Lanka’s foreign debt doubled, from $ 9 billion in 2000 to $ 18.6 billion in 2009. By 2014, this amount had skyrocketed again to $ 42.9 billion, while in January 2017 the total amount owed was $ 46.6 billion – a slight dip. This has resulted in serious pressure on the part of the Government regarding debt servicing, especially from 2019 onwards, with the Government likely to borrow more to meet foreign debt repayments.

Sri Lanka’s new Inland Revenue Act, which aims to shift from indirect to direct taxation, while increasing income tax for higher tax brackets, came into effect in April 2018. However, ordinary citizens have found the instructions for filling out self-assessment forms confusing, resulting in the possibility of citizens being penalised for non-compliance, even though little has been done to push for awareness and education around the new tax system.

Despite this move towards fiscal consolidation and a build-up of foreign reserves to meet repayments, third-party credit rating agency Moody’s Investors Services recently gave Sri Lanka a Negative Outlook, in part due to external vulnerabilities.

The rupee also depreciated to what mainstream media termed a ‘record low’ in April, in part due to pressure on debt repayments, although the Central Bank maintained that there were sufficient reserves to make repayments.

Apart from the obvious pressures that Sri Lanka faces from a macro-economic standpoint due to a precarious situation around foreign debt, there have also been unforeseen consequences that have impacted the general public and marginalised communities in the country.

On 25 June, the New York Times ran an article on the Chinese Belt and Road Initiative, using the Hambantota Port project to illustrate their argument that the Initiative was ‘a debt trap for vulnerable countries’. The article highlighted that the China Harbour Engineering Company had funnelled over $ 3,000,000 into Mahinda Rajapaksa’s 2015 presidential election campaign, including $ 678,000 to print campaign T-shirts and other promotional material, $ 297,000 to buy supporters gifts, including saris, and $ 38,000 for a popular Buddhist monk who was supporting Rajapaksa’s electoral bid. Two cheques totalling $1.7 million were delivered by volunteers to Temple Trees, his official residence.

 In fact, these allegations have been reported on since July 2015. Although Rajapaksa lost the election, in part due to allegations of corruption, there have been no consequences for the allegations made, despite a cheque that was circulated by Government MP Ranjan Ramanayake after he lodged a complaint with the FCID following the New York Times story. 

The cheque showed a donation made by China’s Colombo International Container Terminal to the Pushpa Rajapaksa Foundation (run by the wife of former Minister Basil Rajapaksa). CICT was quick to say that the cheque was a donation for the construction of houses for the less privileged. The CID said they were opening an investigation into the allegations. It is unclear what became of a similar investigation commenced in 2015.

For his part, the former President said he would pursue legal action against the New York Times, but eventually backtracked, promising to pursue action against a mainstream media company that had carried the story in Sri Lanka.

Apart from the Hambantota Port, China is also funding several major infrastructure projects, including the Colombo Port City and the Central Expressway and the Norochcholai coal power plant. Each of these projects have been mired in controversy. For the Expressway, there were continued reports of violation of tender procedure. Environmental concerns have been raised around both the Port City and Norochcholai power plant. 

For the Port City, questions were raised around the Environmental Impact Assessment, while the Norochcholai plant had frequent breakdowns affecting power supply. Several environmental groups raised serious concerns about the operation of the plant, of particular concern given that residents living nearby have complained of respiratory and skin diseases and numerous health issues.

The New York Times article also spoke of the exchange of intelligence – a report on the Belt and Road Initiative in the Economist, interestingly, notes several Sri Lankan Naval Intelligence officers had enrolled in a course on China’s approach to globalisation, funded by the Chinese government. Both officers spoke approvingly of the lack of conditions China imposed along with foreign aid, as opposed to Western countries that try to “impose values”.

This might be a reference to the GSP Plus concession. Sri Lanka lost the concession in 2010 when the EU found Sri Lanka had violated human rights laws during the end of the war in 2009, as part of a probe. The loss of the concession negatively impacted many of Sri Lanka’s industries, especially the garment industry. The pronouncement by the Navy officials is worrying, given the many questions raised about Chinese funded projects already operating in the country, including allegations of corruption.

The incident following the New York Times is only the latest highlighting the profound impact foreign aid has made on Sri Lanka, from a rights perspective. Due to its geographic location, Sri Lanka is attractive to both China and India, with each tussling to gain more of a foothold in the country. Nowhere is this more evident than in Hambantota, where India is reportedly in talks with Sri Lanka to buy over an airport dubbed the ‘world’s emptiest’ – an airport built with Chinese funding. Though India’s State Minister for Civil Aviation denied that the deal was on in Parliament, Sri Lanka maintains that talks are progressing.

Deemed similarly destructive was the controversial Sampur power plant – a coal plant funded by India that was eventually cancelled due to environmental considerations – although India and Sri Lanka briefly considered converting the plant to be LNG-powered.

The Indian housing project was the result of a Memorandum of Understanding between Sri Lanka and India aiming to build 50,000 houses for the conflict-affected. While this news was initially greeted with joy, beneficiaries subsequently found themselves in a debt trap. 

Firstly, the conditions for qualifying for the project were stringent and required significant paperwork, including the need to show proof of ownership. The grant allocations, released in staggered instalments, were insufficient to construct a house, often requiring beneficiaries to take loans from banks and moneylenders. 

This issue has become particularly relevant in 2018. An increasing number of female-headed households, post-war, has led to many vulnerable households applying for loans to microfinance companies. These companies levy exploitative interest rates, forcing families to sign documents in languages they don’t understand, and then pressuring them to make payments they often can’t afford. 

The situation became so dire this year that many women in the North died by suicide as they were unable to make repayments. The Ministry of Finance recently announced a relaxation of repayments for loans under Rs. 100,000 in an attempt to alleviate the situation.

India’s Housing Project was not the only one that raised eyebrows. In 2017, controversy grew around a project for the construction of 65,000 prefabricated steel housing for the conflict-affected in the north and east, funded by steel giant Arcelor Mittal, which is headquartered in Luxembourg. Experts had raised concerns around the houses themselves, noting that they had poor ventilation, were likely to corrode, provided insufficient roof support and limited capacity for repair. They were also more expensive than brick and mortar houses. 

A Fundamental Rights petition was filed with Tamil National Alliance MP M A Sumanthiran alleging that the tender procedure for the project was flawed with the Minister announcing the project had been awarded to Arcelor Mittal even before the process was completed. Had the project gone through, conflict-affected families would have had to settle in houses that demonstrably did not fit their needs.

The amount of recent reportage on Chinese influence would indicate that China has a significant foothold in the country, but this is not entirely true. Only 10% of Sri Lanka’s debt is owed to Chinese banks, with more owed to US investors, although many of the Chinese loans will mature in the next few years.

Controversy has also been raised around projects funded by the World Bank – specifically under the Metro Colombo Urban Development Project. While the World Bank largely provided support to reduce flooding and to strengthen the capacity of local authorities, 91 families were forcibly evicted from their homes along St. Sebastian’s canal, relocated to the Methsara Uyana housing project in 2014. 

In general, civil society has repeatedly raised concerns with the World Bank, which while it sometimes provides extensive Resettlement Action Plans for some projects (such as World Bank-funded projects in Galle and Kandy, and the ADB funded Southern Expressway) also supports local authorities like the Urban Development Authority, which has forcibly evicted vulnerable communities since 2010.

Sri Lanka’s geo-politically strategic location makes it an attractive opportunity for investment – but that investment has sometimes come at a price for citizens. The provision of foreign loans is perceived with deep suspicion by the wider public and is being used by the Joint Opposition to call for a change in Government, despite the Joint Opposition initiating many of the loss-making projects funded by the Chinese.

This is largely because the aid provided to Sri Lanka has had unforeseen impacts on ordinary citizens in a variety of ways, including and not limited to housing, health and the environment, and personal debt. Foreign aid, particularly for development projects should include impact assessments so that the rights of ordinary citizens are not impinged on through their implementation.