Is China to Blame for Sri Lanka’s Debt Woes?

China has never been Sri Lanka’s biggest lender. Nevertheless, as Sri Lanka has fallen into economic woes, particularly in the wake of COVID-19, blame has turned to China. However, Sri Lankan officials have repeatedly expressed the view that China is not the source of the country’s economic woes. So what’s the real story?

China has certainly featured more in Sri Lanka’s economy over the last few years. Back in the early 1970s, Sri Lanka borrowed around 4 percent of its loans from China, and borrowed more from the U.K., Japan, and Germany, at around 17 percent, 8 percent, and 6 percent respectively. At that time, Sri Lanka also borrowed more from the IMF and World Bank – they accounted for around 25 percent and 9 percent, respectively, of the island country’s foreign debt.

Fast forward to 2020 and that profile had shifted somewhat. Japan and the World Bank remained significant lenders at 7 percent each, but the IMF’s proportion had shrunk to just 4 percent, as had the U.K. and Germany, which then accounted for around 1 percent of Sri Lanka’s debt. They had been replaced by commercial lenders (“bondholders”) at 29 percent and China at 14 percent.