Experts say, “The lack of cooperation by Beijing would complicate the debt recovery journey of Sri Lanka”. The magnitude of the economic crisis that Sri Lanka is facing has reached catastrophic proportions. The whole world is astounded by the rampant mismanagement beyond the comprehension of anybody. Once an economic model of Asia, is now reeling under the pressure of a massive debt burden. The country is heading towards an unfortunate and awkward position of being unable to honour its commitments.
Many countries have come forward to help Sri Lanka overcome this financial mess, including its immediate neighbour India extending a helping hand in numerous ways. Nevertheless, the most pertinent and surprising question is about a long-standing friend of Sri Lanka in partnership, China and its deafening silence.
China has strategic interests in Sri Lanka relating to investments. The more dominant investment projects among them are US$ 1.4 billion worth of Colombo Port City and a considerably high stake in the Hambantota Port, and many more. In 2014, during the visit of President Xi Jinping to Sri Lanka, China described Sri Lanka as an “all-weather” friend.
What does that mean for Sri Lankans? Is China a “friend in good and bad times” or vice-versa?
China, at the time of the visit of President Xi Jinping, placed bilateral ties on a firm footing. It was a sequel to president Xi Jinping launching the construction of the $1.4 billion port city, the single largest Foreign Direct Investment project on an artificial island near Colombo. Ahead of his visit to India, Xi wrapped up his two-day trip to Sri Lanka by visiting Colombo Port. At the Colombo Port, he launched the Colombo Port City Project with President Mahinda Rajapaksa.
In 2015 after the defeat of President Mahinda Rajapaksa, then Prime Minister Ranil Wickremesinghe visited China to consolidate bilateral relations and lessen the Chinese debt burden on Sri Lanka. There Wickremesinghe reduced the debt burden by offering an equity share of the Hambantota Port. Wickremesinghe was aware that debt accumulation could cause far-reaching implications economically. The Sri Lanka Podujana Peramuna (SLPP) that dominated the opposition benches opposed the move by Prime Minister Ranil Wickremesinghe. However, Wickremesinghe put the bilateral ties with China in good stead.
Besides, the unanswered query is why China had turned a blind eye, keeping mum for a considerable period when Sri Lanka waded its way towards an economic calamity. In the initial stage of the economic crisis in Sri Lanka, China had rejected a call by the Sri Lankan authorities to reschedule or restructure the debt portfolio. China presumably had stated the unenviable position and had said that it had no system of doing such a thing. Instead, Chinese Foreign Minister, Wang Yi, had advised and encouraged the Sri Lankan President Gotabaya Rajapaksa during his visit to Sri Lanka to endorse the Free Trade Agreement with China.
The Chinese perception is that it would be a step toward ending the Foreign Exchange shortage that plagues Sri Lanka. China, in the early part of 2021, a few months before the visit of the foreign minister, approved a 10 billion yuan ($1.54 billion) currency swap with Sri Lanka. But alas, the agreement has stumbled on a roadblock due to a technical glitch.
Sri Lanka could not even use this money for purchases from China since most of the invoices were in dollars. It is now clear that it was a ploy by the then Central Bank Governor, who wanted to convince the masses of a significant jump in the foreign reserves.
Nevertheless, at that stage, former Finance Minister Basil Rajapaksa requested the Speaker of Parliament of China to explore the possibility of fiscal transfer between the two Central Banks as far as the US$1.5 is concerned. The ex-finance minister proposed this to overcome the recurring economic challenges faced by Sri Lanka.
The idea was to make the currency swap workable that has encountered a stumbling block due to some issues with the technicalities of the currency swap agreement.
The former finance minister has said that China has contributed to the economic progress of Sri Lanka immensely. He also requested to facilitate the expansion of industries such as garments, tea and gems to enter the Chinese market under the Sri Lanka-China Free Trade Agreement.
As the finance minister sought further investment opportunities from China, He also said that Sri Lanka was ready to set up the regional headquarters of the China Development Bank near the Colombo Port City.
The first diplomatic meeting between the high-profile delegation of the Parliament of China and the Parliament of Sri Lanka thus took place on August 31st 2021, using video zoom technology. The Chinese government promised to do its utmost to help overcome the economic challenges and the COVID challenge in Sri Lanka.
Sri Lanka being part of the belt and road initiative mooted by China, it is imperative to explore what inhibits China from making a positive response that helps mitigate the burdens. The massive dollar debt to China running into billions may cause a roadblock in resolving the financial crisis that Sri Lanka is facing. It may put brakes on the efforts to import food and fuel to restore normalcy in the country.
Meanwhile, an Associated Press report filed on Friday said, “Beijing promised to “play a positive role” in talks with the International Monetary Fund on a possible emergency loan. China offered to lend more but baulked at joining a process that might cut Sri Lanka’s debt, possibly for fear other Belt and Road borrowers that owe tens of billions of dollars will demand the same relief.
“If China gives a concession to Sri Lanka, it will have to give the same concession to other borrowers,” the Associated Press said, quoting economist W.A. Wijewardena, a former deputy governor of the Sri Lankan central bank. “They didn’t want to get into that trouble.”
If China tries to avoid debt cuts, that might disrupt the IMF talks or prompt private-sector creditors to hold out for more money, experts say. Lack of cooperation by Beijing “would complicate Sri Lanka’s debt recovery journey,” said Aditi Mittal of Verisk Maplecroft, a consulting firm, in an email.
Chinese officials say Belt and Road projects are business ventures, not aid. Most lending is on commercial terms. Details often are secret. China is the third-highest donor to Sri Lanka after Japan and Asian Development Bank. According to available figures, it amounts to ten per cent of the total debt. Sri Lanka’s decision to announce hard default comes amid a severe crisis as Sri Lanka ran out of the foreign reserves to honour its commitment and the total debt portfolio stands at a whopping 51 billion US$ as of now.
As Sri Lanka is on the brink of an economic crumbling, the Group of Seven economic powers supports efforts to provide debt relief for Sri Lanka, G7 finance chiefs said on Thursday in a draft communique from a meeting in Germany after the country defaulted on its sovereign debt. G7 countries said they were committed to finding long-term solutions for the Indian Ocean nation and urged it to “negotiate constructively” with the International Monetary Fund on a potential loan programme.
“The G7 stands ready to support the efforts of the Paris Club, in line with its principles, to address the need for a debt treatment for Sri Lanka,” they said, referring to the group of wealthy creditor nations.
The draft statement also called on other big creditor nations not in the Paris Club to coordinate with the group and urged them to provide debt relief on proportionate terms. G7 finance chiefs also singled out China, which has assumed the role of a vital creditor to low-income countries, to play a crucial role in delivering debt relief for such countries.