Sri Lanka, Struggling With Debt, Hands a Major Port to China

NEW DELHI — Struggling to pay its debt to Chinese firms, the nation of Sri Lanka formally handed over the strategic port of Hambantota to China on a 99-year lease last week, in a deal that government critics have said threatens the country’s sovereignty.

In recent years, China has shored up its presence in the Indian Ocean, investing billions of dollars to build port facilities and plan maritime trade routes as part of its “One Belt, One Road” initiative to help increase its market reach.

Along the way, smaller countries like Sri Lanka have found themselves owing debts they cannot pay. Sri Lanka owes more than $8 billion to state-controlled Chinese firms, officials say.

Sri Lankan politicians said the Hambantota deal, valued at $1.1 billion, was necessary to chip away at the debt, but analysts warned of the consequences of signing away too much control to China.

“The price being paid for reducing the China debt could prove more costly than the debt burden Sri Lanka seeks to reduce,” said N. Sathiya Moorthy, a senior fellow specializing in Sri Lanka at the New Delhi-based Observer Research Foundation.

Sri Lanka has long been in India’s orbit, but its relationship with China has strengthened in recent years. As Western nations accused Mahinda Rajapaksa, the country’s former president, of grievous human rights abuses during the final stages of Sri Lanka’s nearly 26-year civil war, China extended billions of dollars of loans to Mr. Rajapaksa’s government for new infrastructure projects.

In July, the state-controlled China Merchants Port Holdings Company signed a deal with the Sri Lanka Ports Authority to control a 70 percent stake in the Hambantota port, which lies on the southern coast of the country.

Last Friday, Sri Lanka’s Parliament voted to grant tax concessions to a joint venture led by China to develop the port. On Saturday, the government completed the handover of the port to two state-controlled entities run through China Merchants Port Holdings, which has already made its first payment of $300 million to the Sri Lankan government.

“With this agreement, we have started to pay back the loans,” Prime Minister Ranil Wickremesinghe said in an address to Parliament. “There will be an economic zone and industrialization in the area which will lead to economic development and promote tourism.”

Critics said the lease could set a precedent for Sri Lanka and other countries that owe money to China to accept deals that involve the signing over of territory. After the original port deal was signed in July, Namal Rajapaksa, a member of Parliament and son of the former president, asked on Twitter whether the government was “playing geopolitics with national assets.”

Perceiving a threat to its regional hegemony, India has also watched with suspicion as cranes operated by Chinese firms began to dot the skyline in Colombo, Sri Lanka’s capital. To reset the imbalance, India has partnered with Japan to develop a port on Sri Lanka’s eastern coastline, and it has entered into talks to invest in an airport near Hambantota.

“India has been overwhelmed by China’s offensive in its strategic backyard,” said Constantino Xavier, a fellow at Carnegie India in New Delhi.

But across South Asia, there have been some signs of pushback to Chinese investment, including the recent sidelining of hydropower projects in Nepal, Pakistan and Myanmar.

Mr. Xavier said Sri Lanka’s dependency on China has alarmed some countries. “Countries in the region are beginning to realize the long-term costs of Beijing’s massive investment promises,” he said.

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