From Hambantota to Malé: The stark difference between China’s debt diplomacy and India’s developmental approach
China’s Belt and Road Initiative (BRI) has been widely promoted over the last decade as a road to growth for smaller nations. But the truth has frequently been bleak. Unsustainable Chinese loans have caused many nations, notably Kenya and Sri Lanka, to collapse, resulting in sovereign defaults and the loss of vital assets.
With great pomp and optimism, China launched the Belt and Road Initiative (BRI) in 2013 as a network of improved land and sea connections to better connect China with Asia, Europe, and Africa. Up to a trillion dollars was being offered to accelerate economic growth in the last frontiers of globalisation, reduce the infrastructure gap between Asia and Africa, and encourage the second-largest economy in the world to become more involved in international affairs with the goal of establishing a real multi-polar global power structure.
To determine whether nations would experience debt hardship as a result of financing associated to the Belt and Road Initiative, a study was carried out. They discovered that ten to fifteen nations, with eight of them being of special concern, may experience financial difficulties as a result of future BRI-related funding. Djibouti, the Kyrgyz Republic, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan are among these nations.
The Maldives is facing a mounting debt crisis that threatens its economic sovereignty, as foreign exchange reserves dwindle to precarious levels and large debt repayments loom.
China’s BRI and the debt trap model
It appeared as though China was attempting to rewrite the rules of world development in the early phases of the Belt and Road initiative. There was a buzz and excitement since the projects were larger, riskier, and more expensive than what the public was accustomed to seeing. While stories about multibillion-dollar deals, significant moves, and progress along the Belt and Road glittered on the news tickers, a more comprehensive analysis would have revealed that many of these deals were with nations with “junk” credit ratings.
Making large deals with countries such as Pakistan, Sri Lanka, and Malaysia demonstrated the Belt and Road’s initial inclination to prioritise quantity over quality, expediency over transparency, and the consequences of this approach were seen rapidly across the network.
Case studies: Kenya, Sri Lanka, and Laos
Kenya
As a significant regional transport hub and home to the largest economy in East Africa, Kenya has emerged as a major beneficiary of BRI investments. As part of the BRI, China has worked closely with other countries to develop a number of “mega projects,” including the construction of the Nairobi Motorway, the upgrade of the Standard Gauge Railway (SGR), and the creation of the Eldoret Special Economic Zone (ESEZ), which is a component of the African Economic Zone project.
Kenya also agreed to grave terms on their Chinese loans. The government borrowed $1.6 billion from China to build the Nairobi-Naivasha section of the rail network at a 2% annual interest rate, and an agreement was made stating that 42% of all profits would be utilised to repay the loan. The agreement also states that Kenya must approach China first if it wishes to purchase goods with the proceeds from the rail network. Such terms drive Kenya to make economically unsound decisions, of which China is the sole benefit. Interestingly Kenya must pay off its debt to China if the SGR is not profitable; if it is, it must use the rail revenue to buy Chinese goods and pay off its debt.
Furthermore, because Chinese enterprises neglect to subcontract Kenyan firms, local businesses lose out on valuable infrastructure projects. Kenyan companies earned only 0.9% of the 1.31 billion shillings allocated to a road development project connecting Kisumu and Mamboleo.
About three-quarters of Kenya’s gross domestic product, or 67% of its debt, which has already reached a record $82 billion, comes from Chinese loans. With the addition of the $1.4 billion extension to the Naivasha Inland Container Depot, the loan has increased to $5 billion, and Kenya’s government requested that its Chinese lenders prolong the payback period by an additional 30 years. China imposed a nearly $11 million fine on Kenya in June 2022 for failing to make railway payments.
Sri Lanka
Perhaps the most talked-about case is Sri Lanka, especially in relation to the construction and eventual lease of the port of Hambantota. Former President and Prime Minister Mahinda Rajapaksa was closely linked to this project, which is situated on Sri Lanka’s southern coast.
The port was intended to transform a small fishing village into a major shipping hub. Sri Lanka relied on Chinese financing to accomplish its goal. But Sri Lanka was unable to repay those loans, so in 2017, it agreed to give China a majority equity stake in the port and a 99-year lease to operate it.
China’s official news agency enthusiastically tweeted, “Another milestone along path of #BeltandRoad,” on the day of the handover. The auditor general of Sri Lanka acknowledged in February 2018 that he was unable to precisely estimate the amount of public debt owed by the nation. Increased openness would benefit all aspects, including contracting, payments, and project proposal evaluation.
Laos
Laos is another interesting case of Chinese influence. In an effort to update its outdated infrastructure, the Lao government embarked on a number of ambitious projects, such as building the $6 billion Boten-Vientiane railway that would connect China and Laos. China provided the majority of the funding for this project, with Exim Bank once again being a key player.
In 2020, amid efforts to restructure its debt, China acquired a 90% share in Électricité du Laos Transmission Company, which is in charge of Laos’ electrical grid. This move gave China strategic control over the country’s energy infrastructure, including the ability to cut off electricity supplies to Lao households.
According to the Lowy research, China’s record-high debt might be used for “political leverage,” especially given the Trump administration’s massive cuts to international aid. The research also noted additional large-scale loans made to Honduras, Nicaragua, the Solomon Islands, Burkina Faso, and the Dominican Republic, all within 18 months of those nations moving diplomatic recognition from Taiwan to Beijing.
Laos has not sought structured debt relief from the International Monetary Fund, in contrast to Sri Lanka. China and Laos seem to be avoiding public recognition of the failure of the “China model” in Laos by adopting a “extend and pretend” approach instead. In addition to making Laos extremely susceptible to future economic shocks, this could cost the country’s citizens a decade or more.
Maldives: Economic strain under Chinese debt
According to the Maldives Finance Ministry, the Export-Import Bank of China held 25.2% of the Maldives’ external debt in June 2023 and was the country’s largest single lender. Without identifying the PRC, the IMF stated that the Maldives remained “at high risk of external and overall debt distress” unless “significant policy changes.” The picture painted by the economic statistics is dismal. As of December 2024, the Maldives Monetary Authority’s usable foreign exchange reserves were less than $65 million.
During his trip to China, President Muizzu signed more than 20 memorandums of understanding (MoUs) and asked for debt restructuring and financial support. China has so far provided a US$130 million funding to maintain the Sinamale bridge for free and improve the roads in Malé and Vilimalé. Despite the Maldives’ growing economic problems, China has yet to fulfil its pledge of a five-year grace period, even one year after Muizzu’s arrival. China is reluctant to make new loan offers and has insisted that debt restructuring would make it even harder for the Maldives to get new loans.
India: A stabilizing force
With its “Neighbourhood First” policy, India has intervened to stabilise the Maldives by providing development and financial support. India’s assistance over the past two years has taken the form of grants, infrastructure projects, bond subscriptions, and currency swaps.
India gave a huge lifeline to the Maldives in the form of two currency swaps totalling $757 million. Large-scale infrastructure development work under India’s US$ 800 million line of credit continues on schedule, including a brand-new international airport in the northern Maldives, a bridge and road project in the southern Maldives, a large housing development project in the capital Malé, and a new bridge connecting Malé to its western suburban islands. A second-year extension was granted in May 2025 after New Delhi rolled over payments of a USD 50 million treasury bill in May 2024.
High-profile diplomatic visits and financial assistance from India have given Malé a safety net that allows it to restructure its economy without further entangling itself with Beijing. India also makes sure that no external power takes advantage of the Maldives’ strategic location by bolstering coastal surveillance systems and maritime security cooperation. In addition, India is a major tourist destination for the Maldives, which makes its economic influence more organic and focused on people than China’s transactional strategy.
China’s Belt and Road Initiative has left the Maldives with a significant debt burden and growing worries about sovereignty. India’s quick financial interventions and developmental aid have not only stabilised the Maldivian economy, but have also established New Delhi as a critical partner.
The way forward
From the $400 million RBI currency swap to the Greater Malé Connectivity Project, India’s strategy is trust-based and forward-looking. In the face of growing geopolitical rivalry in the Indian Ocean, the Maldives must acknowledge that India, not China, provides the dependable and sustainable way forward.
The saying of Ernest Hemingway that one becomes bankrupt in two stages “gradually, and then suddenly.” While the projects sound appealing, they frequently come with high-interest loans and unclear conditions. Countries who are unable to meet their obligations must renegotiate their sovereignty, as witnessed with Sri Lanka’s Hambantota Port, which was leased to China for 99 years after Colombo failed to clear its loan.
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