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Why did the Chinese model fail in Sri Lanka?

Krishna Timalsina

August 1, 2022

15 MIN READ

Why did the Chinese model fail in Sri Lanka?

Sri Lanka, which until a few years ago was called the pearl of South Asia, and although the geographical shape of the country looks like a teardrop, its citizens were considered to be the most prosperous and happy in South Asia, has been, sadly, regarded as an example of a failed system and a failed economy.

The country’s gross domestic product had reached 234 billion dollars. This is an indicator of the strong economy of South Asia.

With an average annual economic growth rate of 7.45 percent, the per capita income of Sri Lankan citizens was 11,069 dollars until 2019. Remittances received by Sri Lankan workers from the global labor market were also high.

The country had been receiving US$ 6 billion per year as remittances. In Sri Lanka, which had made great strides in poverty alleviation through the rubber, tea, coconut, tobacco, telecommunications, banking system, garments, and precious stones, before the economic crisis, only 4.3 percent of the citizens living below the poverty line.

This is also an enviable figure for South Asia. Before the economic crisis, the exchange rate of the Sri Lankan rupee was also around that of Nepal.

One US dollar was 145 Sri Lankan rupees. Even so, the tourism industry and the commercial port did not make Sri Lanka feel that it would ever have to fall into an economic crisis.

Mineral deposits in abundance

On July 28, 2021, a type of sapphire known as the world’s largest star sapphire was discovered in Sri Lanka’s Ratnapur region.

The precious gem weighing 510 kg was found while digging a well. Ratnapur is considered to be Sri Lanka’s most valuable gem depository.

Analysts from all over the world regard foreign debt as another important aspect of Sri Lanka’s economic crisis. They have been claiming that Sri Lanka is stuck in the trap of Chinese debt and cannot get up as Sri Lanka alone has more than five billion dollars in debt.

Officials claimed that the gem of light blue color would be sold in the international market for up to 100 million US dollars i.e. about 12 billion Nepalese rupees. When Sri Lanka was in financial crisis. Dubbed the “Serendipity Sapphire,” the rare stone took a year to prove to be a sapphire. Such gem towns are everywhere in Sri Lanka. Ratnapur in the local Sinhala language, as in Sanskrit, means a city of jewels where precious stones are easily found.

Sri Lanka is a major exporter of sapphires and other precious stones. It had earned, in 2021, about 500 million dollars by exporting gems, and processed diamonds. Why did the citizens of such a golden bowl suddenly fall under the grip of starvation? This is a serious matter.

Tilak Weerasinghe, chairman of Sri Lanka’s National Gems and Jewelry Authority, said there were many such special sapphires in private collectors or museums.

No one knows what the status of gems and jewels is in the stateless state, now. It may take a long time to recover from the situation.

Because now Sri Lanka is running out of money to the extent that it cannot even buy the medicine and energy required for hospitals and the books and pens needed for schools.

The pitfalls of organic farming

At a time of high economic growth, the Sri Lankan government launched a nationwide organic farming campaign. Chemical fertilizers were banned.

Sri Lanka’s agricultural sector suddenly faced a deep crisis after the country decided to completely ban the use of chemical fertilizers and adopt 100 percent organic farming. After the agricultural production decreased by more than half, the shortage of rice and sugar in the country increased.

Certainly, when commercial and political interest groups started storing grain in excess of the requirement, its impact was seen in the food market.

The tourism sector, which is a significant contributor to Sri Lanka’s economy, was also on the decline due to the coronavirus pandemic.

In 2019, before the outbreak of the pandemic, suicide bombings in churches and hotels in Colombo devastated the tourism industry.

It is notable that the contribution of the tourism sector to Sri Lanka’s total GDP is above 10 percent. However, after the tourism industry shrank for almost 2 years, negative indicators were seen in agriculture, another major contributor to the economy.

To deal with this negative indicator, the Sri Lankan government signed a $1.1 billion agreement with China in 2017 for the development and control of a seaport, Hambanthota.

The Sri Lankan government could not pay the foreign debt even after handing over the port near the main shipping route to Asia and Europe, saying that the Chinese army would not be stationed in the area and that China would only do business transactions.

Now, with the foster children business booming amid the Sri Lankan crisis, a young Sri Lankan man named Rowan Van Vilne has launched a special campaign through a social media group based in the Netherlands.

The then Prime Minister of Sri Lanka, Ranil Wickremesinghe, and his family, only misused the money from this agreement to pay the foreign debt.

Thousands of villagers were displaced after the port, which was leased for 99 years by a Chinese state-run company, comprising 1,500 acres of land for an industrial zone was handed over to China.

Debt trap and Foreign Debt

Analysts from all over the world regard foreign debt as another important aspect of Sri Lanka’s economic crisis. They have been claiming that Sri Lanka is stuck in the trap of Chinese debt and cannot get up as Sri Lanka alone has more than five billion dollars in debt.

Moreover, the debt burden of India and Japan, and the institutions like the International Monetary Fund are also similar. By the time of the financial crisis in April 2021, Sri Lanka’s total debt burden had reached $35 billion. Now, this debt burden has exceeded 51 billion US dollars.

Sri Lanka eventually collapsed due high-interest to pay high-interest rates on foreign loans and the crisis in a sector that contributed greatly to the country’s economy.

When the new government was formed three years ago, Sri Lanka had foreign exchange reserves worth $7.5 billion. However, in July 2021, reserves fell to $2.8 billion.

When Sri Lanka’s foreign exchange reserves dwindled to $1.58 billion last November, countries, and institutions that were considered partners in Sri Lanka’s prosperity withdrew their support. Even though a new government has been formed now, Sri Lanka is not in a position to repay its foreign debt installments.

Sri Lanka’s economy is in shambles. It will take several more years to get out of the problems associated with foreign currency exchange.

Sri Lanka was also experiencing a sharp trade deficit like Nepal for the past two years. The over-reliance on imports began to extend to food through materials such as sugar, pulses, grains and medicines and the ban on chemical fertilizers reduced domestic food production by more than half.

Forgery of foster children in crisis

In Sri Lanka, since 1980, the foster children business seems to have flourished. According to a Dutch-language documentary made public after Sri Lanka declared a state of emergency last year, nearly 4,000 children have arrived in the Netherlands as adopted sons or daughters.

This number may be higher. Similarly, thousands of children have been taken to countries including Sweden, Denmark, Germany, and the United Kingdom using fake documents.

After the country became economically prosperous, there was a decrease in selling children among Sri Lankans.

The attempts for the loans and grants failed indefinitely. Following this series of talks, China signed a US$1 billion loan and US$1.5 billion currency swap agreement with Sri Lanka in 2020.

However, amid the recent economic, social and political crisis, Sri Lankan children are once again being used in fraudulent business for adoption. There has been an increase in the number of children being handed over to families in Western countries from baby centers that sell babies, called baby farms, which have opened in Sri Lanka of late.

There is no information about the birth mother of the children who have arrived in the Netherlands or various European countries.

Now, with the foster children business booming amid the Sri Lankan crisis, a young Sri Lankan man named Rowan Van Vilne has launched a special campaign through a social media group based in the Netherlands.

He is a citizen of the Netherlands who was adopted from Sri Lanka 28 years ago and who has returned to Sri Lanka many times in search of his birth mother.

The network that reunites mothers with their estranged children by adopting sons or daughters has now launched a special campaign aimed to discourage the selling of children filling wrong personal details.

Millions of citizens are starving

In Sri Lanka, for the first time since the establishment of the country, citizens are starving due to a lack of food.

According to the information released by the United Nations World Food Program last week, 9 out of every 10 families are unable to eat. Hospitals are closing due to the lack of equipment and medicine.

The number of Sri Lankans who have left the country can hardly be counted. There are millions of people who want to get a passport.

As a result of domestic problems such as mismanagement and corruption, the family of the then President, Prime Minister, and the Rajapaksas, who held important positions for a long time, had to leave the country.

The Sri Lankan Rupee has now weakened by Rs 365 against the US Dollar. If this situation persists, Sri Lanka will not be able to pay the 25 billion US dollars due by 2026.

About 7 billion dollars of foreign debt has to be paid this year. However, the vault is empty. According to the Colombo Times, Sri Lanka, which has been close to China for a long time, is now expecting a big help from India.

Negotiations are ongoing with the International Monetary Fund (IMF). The fund has asked to submit a detailed action plan to improve the economy.

According to the Colombo Times, China had been encouraging Sri Lanka since 2016 to stop talks with the US regarding Sri Lanka’s military activities.

The Rajapaksa government could not analyze this China’s long-term strategy. After losing trust with America due to China, Sri Lanka finally had to hand over the Hambanthota port itself. In the meantime, Colombo has proposed to China a moratorium on debt servicing or partial forgiveness to reduce its debt burden.

The people’s anger is exploding at the difficulties in livelihood they are exposed to. As a result, the Sri Lankan people who are targeting the President’s residence, the Prime Minister’s private residence, the Speaker of the Parliament, and the MPs are now facing an economic crisis and are in a wait-and-see situation.

However, the details of this have not come out, Colombo Times wrote. After the country fell into a foreign exchange crisis, China issued a 500 million US dollar loan for 10 years to deal with a possible economic collapse.

Conditional loans are offered in the meantime. However, a handful of Chinese conditional loans were fatal.

The attempts for the loans and grants failed indefinitely. Following this series of talks, China signed a US$1 billion loan and US$1.5 billion currency swap agreement with Sri Lanka in 2020.

Even then, China offered token aid worth $76 million, including $31 million in humanitarian aid, bound by the terms of the port’s rents.

This year, Sri Lanka is under pressure to pay more than US$1.5 billion for debt servicing to China. The specific Chinese model for the development of Sri Lanka, which has been run according to the short-sighted Chinese plan to accelerate economic growth for a decade, has failed.

Chinese products have captured the Sri Lankan market. Sri Lanka has cut its production. Colombo has lost access to industrial areas and ports.

However, the Sri Lankan government never considered the increasing Chinese share in the country’s foreign debt and economic activities as a problem. Sri Lanka, which had been the jewel of South Asia, is now paying the price for this ignorance and indifference.

The Sri Lanka government is running on small aid from other governments like the US, Japan, and Australia. Many employees have been sent on leave for 3 months.

The people’s anger is exploding at the difficulties in livelihood they are exposed to. As a result, the Sri Lankan people who are targeting the President’s residence, the Prime Minister’s private residence, the Speaker of the Parliament, and the MPs are now facing an economic crisis and are in a wait-and-see situation.

This is the first time that Sri Lanka has faced such a bad situation after becoming an independent country in 1948.

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