Colombo Telegraph

Chinese Chasm (a`la Dutch Disease) In Sri Lanka

By Muttukrishna Sarvananthan

Dr. Muttukrishna Sarvananthan

It has become a ritual of certain politicians of the ruling coalition and senior government bureaucrats (including members of the Rajapaksa family) to browbeat Western countries (at times India as well) citing the Chinese alternative. But Sri Lanka’s international economic reality is such that there is no way China or even India could displace or replace UK and USA (the Western World in general) as the premier international development partners of Sri Lanka.    

Sri Lanka’s external economic relations (especially international trade and foreign investments) are dichotomous. That is, the largest destinations of Sri Lanka’s exports are the Western countries (top two are the USA and UK) and the largest sources of imports are the Asian countries (top three are India, Singapore, and China). Similarly, while the USA is the single largest source of foreign portfolio investments in the stocks and shares of the private companies in Sri Lanka and in the government securities (rupee and foreign-currency denominated Treasury Bills and Bonds and Sovereign Bonds), foreign direct investments (FDI) are largely from Asian countries (especially, India and Malaysia). The flow of tourists to the country is dominated by Europeans (particularly, British, French, and German), North Americans, and Australasians combined (more than 50%) in spite of the single largest source of tourist arrivals from India. Besides, Western tourists in general spend much more than Eastern tourists.


In the past five years (2007-2011), the share of Sri Lanka’s exports to the top two destinations, viz. USA and UK, has declined in terms of share of the total exports. In 2007, the USA accounted for almost 26% of the total exports of Sri Lanka, which declined to around 20% in 2010 and 2011. Similarly, in 2007 and 2008, the UK accounted for little more than 13% of the total exports of Sri Lanka which declined to 11.5% in 2010 and 10.5% in 2011. However, in terms of absolute monetary value (US$), exports to the UK remained more or less unchanged in the past five years at around one billion dollars annually; exports to the USA also remained more or less unchanged at around two billion dollars (annually) in 2007 and 2011, despite declining during the in-between years.   

In the past five years, while Sri Lanka’s imports from the UK had marginally increased from 230 million dollars in 2007 to 304 million dollars in 2011, Sri Lanka’s imports from USA significantly decreased from 412 million dollars in 2007 to 266 million dollars in 2011. However, UK’s share in the total imports of Sri Lanka (in terms of share of the total) declined from 2.0% in 2007 to 1.5% in 2011. Similarly, the share of the USA in the total imports of Sri Lanka declined significantly from 3.6% in 2007 to just 1.3% in 2011.

The foregoing figures indicate that, in terms of international trade, Sri Lanka’s export and import trade (in total) with the UK and USA has stagnated (at best) in terms of absolute value but declined in relative terms as a share of the total export and import trade of Sri Lanka. Besides, exports are more beneficial for the country in economic terms than imports because of creation of employment and foreign currency earnings.

Sri Lanka’s exports to China are paltry. Sri Lanka’s exports to China were worth only 34 million dollars in 2007 (mere 0.4% of the total exports of SL in that year) which has increased to just 103 million dollars in 2011 (1.0% of the total exports of SL in 2011). Hong Kong accounted for additional 1.0% of the total exports by Sri Lanka in 2011.


In terms of portfolio investments (in the stocks and shares of Sri Lankan companies and in government securities), private investments from the USA has increased in Sri Lanka in recent years because of very low returns on such investments in their home (USA) markets due to the economic recession there and significantly higher returns in Sri Lanka. The USA is the single largest source of private foreign investments in rupee and foreign-currency denominated Treasury Bills and Bonds and Sovereign Bonds in Sri Lanka though the data is not publicly available. However, there is very limited (if at all) Foreign Direct Investments (FDI) from the USA, UK or any other Western country, which is much more enduring than foreign portfolio investments.

There is no notable portfolio or direct investment by China in Sri Lanka, except the proposed foreign direct investment in a five-star hotel by Shangri-La Group from Hong Kong.

Foreign Loans

More strikingly, in 2005 out of the total outstanding foreign debt of Sri Lanka 48% was accounted for by multilateral donors (ADB, IMF, World Bank, et al) and 45% by bilateral donors (DfID, GIZ, JICA, USAID, et al), and only less than 7% by private international financial markets. In contrast, in 2011 the total outstanding foreign debt of Sri Lanka to multilateral donors declined to 31%, to bilateral donors declined to 36%, but the foreign debt owed to private international financial markets increased to 33%. Whereas bilateral and multilateral foreign debt incurs very low interest rate (0.0 – 2.0%), borrowings from private international financial markets incurs 6.0 – 8.0% interest rate. Therefore, the former is much more beneficial to the country than the latter. Besides, almost all the private international financial market borrowings are from the Western countries.

Only in terms of foreign aid China has emerged as the single largest bilateral donor in the last few years (2010-2012), which are handful of project-based and may not last beyond the completion of those projects. Moreover, China’s loans to Sri Lanka incur considerably higher interest rate than the interest rate on traditional concessionary loans by bilateral and multilateral Western donors, but lower than the interest rate on private international financial market borrowings.


While over 50% of the tourists to Sri Lanka are from Western countries, the annual tourist arrivals from Hong Kong were a mere 186 in 2007 but increased to just 2,199 in 2011 (mere 0.3% of the total arrivals of tourists in SL in 2011). Tourist arrivals from mainland China is even less than that from Hong Kong.

In summary, Sri Lanka’s international economic relationship (trade – especially exports, investment, tourism, and foreign loans) is overwhelmingly dependent on the USA, UK (and other Western countries), and India is the only notable Eastern country. China accounts for less than one percent of Sri Lanka’s total exports, total foreign portfolio and foreign direct investments, and total tourist arrivals in Sri Lanka.

I hope and wish economic sanity prevails over political haranguing in the international relations of Sri Lanka.

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