Vanishing Millions : The Hidden Tale of Sri Lanka’s Debt Trap (Part 01)

(Tharindu Jayawardhana)

The Sri Lankan government and government agencies undertake many projects each year by securing foreign loans. Some projects are long-term, large-scale endeavors, while others are short-term initiatives. Recently, there has been considerable discussion surrounding these projects. One such project is Gin-Nilwala, and the media reported, quoting the Auditor General, that nothing happened to Rs 401 crores received as an advance. It was reported that Sri Lanka became a bankrupt state due to its inability to repay the foreign loans obtained for the projects. When the loans taken for the projects could not be repaid, the government had to take on more loans to pay off the installments.

This article focuses on loan-funded projects, and much of the related information has been obtained through requests made under the Right to Information Act. While this piece provides a brief overview of projects financed through loans, we aim to delve deeper into each project in future articles.

Obtaining Loans Despite Inability to Repay

At the beginning of last year, i.e., 2023, the number of large-scale projects being implemented with foreign loans was 114. The loan amount obtained for these 114 projects is approximately 14,279.62 million US dollars, which is ten times the income received from Sri Lanka’s tea exports in 2023.

Of these projects, 23 have received loans from the Asian Development Bank, 21 from the World Bank, 8 from Chinese banks, 12 from Japan, 2 from Korea, 13 from the Middle East, 10 from South Asian countries and 22 from countries such as Germany, France, and the Netherlands. Additionally, loans have been obtained for 3 projects from the International Fund for Agricultural Development.

Sri Lanka will have to pay loan installments and interest until the year 2061 for these specific loans taken for the projects. Even though the status of the projects being implemented last year remains the same, loan installments are still being paid even for projects that were completed before that.

During the period from 2021 to 2024, when Sri Lanka was facing severe economic crisis, the number of new loan agreements signed by Sri Lanka was 23. Sri Lanka signed six loan agreements in 2023, with a total value of 2029.9 million US dollars. Of this, only the US$ 495.6 million received from the International Development Association is interest-free; the rest of the amount must be repaid along with interest. The amount of 728.1 million US dollars provided by the International Monetary Fund is also considered a loan, despite being perceived by many as a grant.

In 2022, Sri Lanka signed 6 foreign loan agreements, totaling 1805.5 million US dollars. All six agreements entail interest-bearing loans. Five of these agreements were signed during the presidency of Gotabhaya Rajapaksa. In 2021, 11 loan agreements were signed, with a total value of 1138.7 million US dollars. Interest will not be accrued only for the loan amount obtained from Hungary for the construction of flyovers in Kohuwala and Getambe; for every other loan obtained that year, interest will be added to the principal.

The total amount paid last year in installments for loans taken by the Government of Sri Lanka was 2510 million US dollars. In the first two months of this year alone, the amount paid for loans was 86.77 million US dollars.

By December 2023, the total foreign debt of the Sri Lankan government amounted to 37.3 billion US dollars.

It is concerning that the Government of Sri Lanka has continued to take loans for projects without properly assessing the status of ongoing projects.

Borrowing for certain projects has been done without conducting proper feasibility studies. The consequence of not conducting such studies for projects financed through interest-bearing loans is severe damage to the country’s natural resources and economy. The Uma Oya project can be cited as the best example. Moreover, the failure to implement some projects in accordance with environmental assessment reports is another serious issue, directly impacting climate change throughout the country.

After the commencement of certain projects, issues have arisen with awarding related contracts, and in some cases, corruption and fraud have occurred more frequently due to violations of financial regulations and procurement guidelines.

There are instances where it is impossible to repay the loans taken for certain projects, a fact recently acknowledged by the Department of External Resources to the Right to Information Commission.

Loan Agreements

The government signs two types of agreements to borrow money: bilateral agreements and multilateral agreements. Agreements signed to obtain loans from institutions such as the Asian Development Bank, European Union, and World Bank are referred to as multilateral agreements, while bilateral agreements are signed with states or agencies thereof.

Institutions such as the Asian Development Bank and the World Bank, which often provide loans under multilateral agreements, publish copies of the loan agreements signed with states on their websites for easy reference. The Department of External Resources stated at the RTI Commission that many other countries do not want the agreements they have signed to be made public.

Sri Lanka has legislation related to borrowing from foreign countries, known as the Foreign Loan Act No. 29 of 1957. The Act, which came into force on April 13, 1957, has been amended several times. The Act grants the President or any person specially authorized by him the power to sign agreements related to foreign loans or guarantees.

The third section of the Foreign Loan Act stipulates that all money payable in relation to foreign loans shall be charged to the Consolidated Fund of Sri Lanka. The Minister of Finance is responsible for making orders related to foreign loans, and such orders must be published in the Gazette. Additionally, these terms must be submitted to Parliament within one month.

The inability of Sri Lanka to repay loans underscores the collective irresponsibility from the President to officials involved in loan acquisition. Many projects funded by these loans have proven detrimental to the country, with some facing challenges in maintenance. Instances of fraud and corruption in certain projects are rampant.

We intend to expose these projects and the malpractices associated with them through a series of investigative articles.