By Dr. Priyanga Dunusinghe This is the start of a column aimed at promoting a development discourse in the context of Sri Lanka by drawing readers’ attention to nationally and internationally important socio-economic issues; in particular, making available a political economic analysis on issues faced by Sri Lanka and other developing countries. Moreover, the articles will be evidence-based and more often information will be extracted from research done in the respective fields. Let us kick things off with a much discussed, but often misunderstood subject: Public debt. A number of low and middle-income countries around the world are in, or at high risk of being in, debt distress – the inability to service public debt. The International Monetary Fund (IMF), in its latest news bulletin on 18 January, wrote: “The burden of public debt is a growing problem across the globe.” Sri Lanka would know. Data on debt stock and services clearly indicate that Sri Lanka has a debt problem. Total public debt stock to GDP ratio in Sri Lanka was around 80% by the end of 2018. More importantly, Sri Lanka needs to pay back $ 4 billion per annum during 2019-2022. Exacerbating the situation is the fact that non-concessional or commercial borrowing accounts for 60% of the total debt stock and leading credit rating agencies have downgraded Sri Lanka’s credit worthiness, ensuring that any future borrowing would only be possible at higher interest rates. In recent years, a number of local and foreign personalities/media argued that Sri Lanka has fallen into Chinese debt diplomacy. For instance, in mid-2018, US Vice President Mike Pence cited the Hambantota port deal as one of the classic examples of Chinese debt diplomacy. He warned developing countries to be cautious when strategic infrastructure projects are launched with Chinese loans. The UNP-led Yahapalana alliance also accused the then-Government over Chinese debt funded projects arguing that China marched Sri Lanka into debt trap. Nevertheless, the Yahapalana Government borrowed heavily from China during the last few years and brushed off its previous claim. By countering, the Chinese embassy in Colombo issued a press release claiming that Chinese loans account just 10.6% of the total debt stock in Sri Lanka. In this context, one may wonder whose position clearly depicts the true debt crisis in Sri Lanka. This warrants an in-depth look into Sri Lanka’s debt position. A close look at Sri Lanka’s foreign debt shows that Sri Lanka has heavily borrowed from commercial sources, primarily using international sovereign bond (IBS) and foreign currency term financing facilities (FTFFs). For instance, during 2007-2018, Sri Lanka borrowed around $ 15.3 billion using the above two sources. The ISBs and FTFFs together account for 33% of Sri Lanka’s outstanding foreign debt in 2017 (see Figure 1). In the same period, Sri Lanka obtained from China a total of $ 9.2 billion as development loans and an additional $ 1 billion as a FTFF in 2018. Nearly 60% of the total development loan of $ 9.2 billion is on concessionary basis having around 15-20 years of maturity period. Chinese non-concessionary loans account for nearly 20% of Sri Lanka’s total non-concessionary foreign loan stock. In this context, it is quite clear that rising debt service burden is primarily due to ever-rising stock of non-concessionary loans obtained by Sri Lanka over the years, and Chinese concessionary and non-concessionary loans played a limited role in aggravating the debt distress in Sri Lanka. However, going beyond the statistics, one must concede that Sri Lanka has also been a victim of circumstances. Along with some developing countries in Asia and Africa, Sri Lanka tapped the resources that were available under China’s Belt and Road Initiative (BRI) for infrastructure development. The reality is that Chinese funds are available with less stringent conditions, and are not tied to the protection of human rights or democracy. Hence, most developing countries that do not fulfil these criteria opt to rely on Chinese funding. In some cases, political leadership in developing countries initiated mega projects with little or no proper evaluation on the financial feasibility of the projects. The best examples include the Hambantota Port and Mattala Airport projects in Sri Lanka. When such projects failed to turn into commercial ventures, the countries find it difficult to service debt. The fate fallen on Hambantota Port is often cited internationally, and countries may be very much wary of such a destiny to be experienced in their lands. A number of development projects funded by China met a similar fate in some Asian and African countries such as Djibouti, Kenya, Maldives, Pakistan, and Mongolia. Therefore, it is clear that, whether it is referred to as debt trap diplomacy or some other term, China is, at least partly, responsible for the accumulation of bad debt in developing nations. This is mainly due to the fact that it plays a small role in ensuring the proper use of development loans by placing the required conditions. In particular, China has paid little attention to the financial feasibility of mega projects or whether the borrower has a commercial plan to use the debt-financed infrastructures. Instead, China has, knowingly or unknowingly, promoted prodigal political leaders in developing countries. (Dr. Priyanga Dunusinghe is a senior lecturer at the Department of Economics of the University of Colombo and holds a PhD, MA (Japan), MA, BA Honours (Colombo). He can be reached at dunusinghe@econ.cmb.ac.lk)