China’s loans and foreign direct investments (FDI) to Sri Lanka reached $7.3 billion by the end of 2018, according to the International Monetary Fund (IMF).

Loans to the public sector, including state-owned enterprises, reached $5 billion, while infrastructure-related investments amounted to $2.3 billion, according to the IMF’s May 2019 Country Report.

Chinese loans account for 9% of central government loans, behind the Asian Development Bank (13%), the World Bank and Japan (both at 10%).

The IMF report looked at China-funded infrastructure in the country in a section called ‘Status of China’s Belt and Road Initiative Projects in Sri Lanka’.

Sri Lanka is a part of China’s ambitious Belt and Road Initiative, which will create a 65-country economic bloc across Asia, Africa, Europe and South America. The infrastructure requirement is estimated at $26 trillion by 2030, and China has directly invested $70 billion across 3,000 projects to-date.

In Sri Lanka, infrastructure-related FDI from China amounted to about $2.3 billion over 2013-2018, of which $1.5 billion took place over 2017-2018, the IMF said. Under the Belt and Road Initiative, Sri Lanka has undertaken the development of two large-scale capital projects: Hambantota Port and Colombo Port City.

The Hambantota Port in the south was built with bilateral loans from China totalling $1.1 billion. The maturity periods of these loans ranged from 15 to 20 years, with interest rates of 2-6.3%.

The port suffered losses after commencing operations in 2012 due to low utilisation. In 2017, the government restructured the original loans and reached a 99-year concession agreement with China Merchant Port Holdings (CMPH), which paid $1.1 billion for 85% of the port. China Harbour Engineering Company invested $1.4 billion in the Colombo Port City project to reclaim 269 hectares of land. When completed, the city would accommodate residential, retail, financial and commercial activities. The Chinese firm was granted 116 hectares on a 99-year leasehold.

The introduction of a special regulatory regime for an international financial centre at the Port City is under consideration. Apart from the Belt and Road projects, China is funding other infrastructure in Sri Lanka. China’s Exim Bank has loaned nearly $2.6 billion for two expressway projects in the south and central provinces.

Attracting investors to develop the Hambantota Economic Zone and Colombo Port City is critical, given Sri Lanka’s debt sustainability risks, the IMF said. Among the initiatives, Sri Lanka is drafting new laws to improve budget processes and control risks from public-private partnerships (PPP). New PPP guidelines to strengthen the project selection and appraisal process are also being finalised, the IMF noted.

“It is also important to ensure transparency and even-handedness across all investment development projects, allowing investors to access generous incentive regimes under the Inland Revenue Act, while avoiding any ad hoc tax exemptions,” the IMF says.