In Sri Lanka, as a country, there will be no resolution of its debt restructuring problems without help from China as the country is poised on the brink of economic collapse
As a result of the recent default, Sri Lanka is experiencing its worst financial crisis since it gained independence in 1948. Aside from running out of fuel, the country is also on the verge of a potential shortage of basic staples, such as food and medicine.
In recent months, anger over the deepening economic crisis has spilled over into street protests. Sri Lanka’s ex-president, who has been blamed for the economic mismanagement, has been forced to resign and flee the country after anger towards his government spiraled.
On Sunday, Acting President Ranil Wickremesinghe declared a state of emergency to quell protests ahead of a vote in parliament on Wednesday to elect a new leader.
It is crucial that China provides significant debt relief to Sri Lanka in order to accelerate the debt restructuring and help the country exit from its current crisis, dr. Umesh Moramudali said, professor at University of Colombo.
One Belt One Road ( OBOR )
Under its Belt and Road Initiative, China has invested billions in Sri Lanka. The mass infrastructure development project started in 2013, aiming to construct ports, roads, railroads, and pipelines in Asia, Europe, and Africa.
“Sri Lanka needs to come to a common framework and what the international community is insisting is that China also agrees to a common framework for a debt restructure,” Moramudali said. “It’s not quite clear yet, what level of negotiation we are in, particularly with China.”
During a press conference last week, a spokesperson for the Chinese foreign ministry stated that “shortly after the Sri Lankan government announced to suspend international debt payments, Chinese financial institutions reached out to the Sri Lankan side and expressed their readiness to find a proper way to handle the matured debts related to China and help Sri Lanka to overcome the current difficulties.”
In 2017, Beijing took over a strategic port in Sri Lanka after the country defaulted on its debt.
Critics accuse Beijing of operating a debt trap, stating that once a country borrows from China, it’s left without other options and must sign over its national territory, concede territories, or worse. China denies those allegations.
Sri Lanka claimed that China accounted for about 10% of its total debts in April last year, but Moramudali said that is probably not the case.
“I mean this 10% is also an underestimate,” he said, adding that further research revealed a more accurate picture of China’s lending to Sri Lanka.
“Sri Lanka’s [debt] to Chinese creditors comes about 20%, not really 10%. So all these 20% will have to be restructured. That means you’ll have to look at how China Development bank will deal with restructuring and China’s Exim bank will deal with restructuring,” he said.
Errors resulting in tragedy
Sri Lanka can’t get approval for the $1.5 billion credit line it sought from China, and has yet to hear back on the request for the $1 billion loan from China, according to a Bloomberg report.
In a speech at last week’s Group of 20 summit, U.S. Treasury Secretary Janet Yellen stated that it is in China’s best interest to restructure Sri Lanka’s debt.
“China is, of course, a very important creditor of Sri Lanka. Sri Lanka is clearly unable to repay that debt. And it’s my hope that China will be willing to work with Sri Lanka to restructure the debt — it would likely be both in China and Sri Lanka’s interest,” Yellen said in a press conference.
According to political analysts, Sri Lanka is in a tough spot over its debt to China.
“One of Sri Lanka’s tragic mistakes was in 2020 when the pandemic hit, it did not engage in restructuring negotiations with its creditors,” Akhil Bery, an expert from the Asia Society Policy Institute,
He told us that it was apparent at that point that the debt was unmanageable.
“The other hubris that came on behalf of Sri Lanka politicians is believing that China would come to their help and restructure their loans,” Bery Said.
“While China is willing to perhaps engage in a rollover of debt or refinancing of the debt, it’s not willing to take on restructuring because of the precedent it will set.”
International Monetary Fund Bailout
Sri Lanka currently has $2 billion in foreign exchange reserves against $7 billion in total debt maturing this year, including $1 billion in notes maturing in July, according to central bank data obtained by Reuters.
On Monday, Wickremesinghe said the country had almost finished talks with the International Monetary Fund on possible debt relief.
The IMF talks “are nearing conclusion, and discussions with donor countries are also progressing,” according to a tweet from Prime Minister Wickremesinghe’s office.
“The [IMF] negotiations will resume once there is a new government. It’s not going to be concluded as quickly as the acting president says. I think we all need to acknowledge that because it’s going to take maybe a couple of months to finalize the agreement,” said by Moramudali .
The IMF ended its negotiations with Sri Lanka in June after failing to agree on a bailout package.