Homeworld News

Politically motivated infrastructure projects part of the reason for Sri Lanka's economic crisis

world | IST

Politically motivated infrastructure projects part of the reason for Sri Lanka's economic crisis

Mini

The Sri Lanka government embarked on a series of infrastructure projects, including the Hambantota Harbour and Colombo Port City. With the promise of strong revenues and a stronger foothold in the project commercial landscape, Sri Lanka took loans from other countries including China, to finance these projects. However, things didn't go according to plan.

The streets of Colombo in Sri Lanka were a witness to a civil war less than 14 years ago, and as it ended in 2009, the people looked forward to an era of peace and development. Tourism was flourishing, and the government, under then President and current Prime Minister Mahinda Rajapaksa, embarked on a series of infrastructure projects, which included the Hambantota Harbour and Colombo Port City, among others. These two marquee projects were to cost the government over USD 17 billion.

The Hambantota project, located in the southern part of Sri Lanka, which is a stronghold of the Rajapaksa family, is said to be politically motivated and experts believe that is the reason why the government went ahead with the project, despite knowing what it could do to the country.
With the promise of strong revenues and a stronger foothold in the project's commercial landscape, Sri Lanka took loans from other countries including China, to finance these projects. However, things didn't go according to plan.
Also Read:
Economist Dr Aminda Perera too said that these projects, instead of making profits for the government, in turn are causing huge losses.
Operational since 2011, the Harbour recorded losses till 2016.
Sri Lanka looked set for a reprieve from its debt burden when it leased 80 percent of the Hambantota project to China Merchants Port Holdings Company for 99 years for USD 1.12 billion. However, that did not happen. Reports suggest that instead of using the money to pay off their earlier debt, the government used it to add to its foreign reserves and honour unrelated foreign debt obligations.
In addition, since the money was for a 99-year lease, it was not a debt-for-equity swap, and this means Sri Lanka still has a large loan to repay.
Around 258 kilometers away, the Colombo Port City, is the other big infrastructure push by the government, with an estimated cost of USD 15 billion. The project was to house a special economic zone that would attract investments from domestic and foreign companies via tax exemptions. But the project itself has seen multiple starts and stops, mainly due to political unrest and problems with funding.
Advertised as 'An economic game changer', the Colombo Port City is far from changing the game in Sri Lanka's favor. The Rajapaksa government claimed that this project was an attempt to compete with Dubai and Singapore. The Sri Lanka government took a loan of USD 1.4 billion from a Chinese investor, who has 43 percent of this project on a 99-year lease. Experts and economists fear that like the Hambantota project, Colombo Port city can also fall in Chinese hands given the current situation when Sri Lanka can't pay off its debts.
Experts say that one of the major reasons both these projects are floundering is because political mileage overshadowed economic rationale and unfavourable viability reports were ignored.
Experts, banking professionals, economists and international experts had warned the government against this pattern, but it still went ahead.
Political analyst Shashi Dhanatunge said that political aspects took over the economic aspects. The projects were made in politically suitable areas rather than the areas which could have generated revenue, Dhanatunge said.
Neither port has delivered much revenue in the last few years because of weak commercial activity — first came the COVID-19 pandemic, which disrupted global supply chains and curtailed operations for the better part of 2 years and then came an economic crisis through which Sri Lanka has had no money to pay for imports and has suffered setbacks that have hurt exports.
Now, Sri Lanka is on the brink of bankruptcy. It has to repay nearly USD 7 billion dollars this year, out of its total USD 25 billion of foreign debt. It is negotiating for aid from agencies such as the International Monetary Fund (IMF), and from other countries including China and India to stay solvent. So vanity projects like these may take years to revive.
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!

Most Read

Market Movers

View All
Top GainersTop Losers
CurrencyCommodities
CompanyPriceChng%Chng