China leaves crisis-ridden Sri Lanka in the lurch to fend for itself
The economic and financial condition of Sri Lanka is very precarious at the moment. It has been facing the worst economic crisis since its independence in 1948. The Sri Lankan economy is going through a high rate of inflation, a shortage of essential commodities including fuel and medicines, and a depleted foreign exchange reserve insufficient for import cover of even a few weeks.
In FY 2022, its economy shrank and registered an economic growth of -11 per cent, i.e. the economy declined by 11 per cent. In this fiscal year, the economy is expected to further shrink by 3.5 to 4 percentage points, registering around -3.5 per cent to -4 per cent economic growth.
A number of factors are responsible for creating such a mess including poor policy decisions (such as tax cuts and banning the usage of chemical fertilizers), COVID-19 impact affecting the tourist footfalls and thus the forex reserves, a global slowdown adversely affecting Sri Lanka’s exports, amongst others. Compounded by the political mismanagement, cronyism and nepotism of the previous Rajapaksa rule, the crisis further worsened.
Currently, Sri Lanka is trying to reach a preliminary deal with the International Monetary Fund (IMF) for a sum of USD 2.9 billion to tide over the deteriorating economic condition. However, to avail of IMF facility assurances from its major creditors, namely China, Japan and India, is the precondition if Sri Lanka wants to obtain bridging finance from the market and other financial institutions like the Asian Development Bank and the World Bank.
In this regard, the International Monetary Fund (IMF) and the Paris Club have recommended that Sri Lanka’s debt restructuring should be carried over 15 years.
Following this recommendation in earnest, India decided to fully support the IMF’s debt sustainability analysis of Sri Lanka. India has extended a 10-year debt moratorium to Sri\ Lanka, with a debt restructuring period of 15 years.
While hailing India’s support, Sri Lanka was expecting a similar measure from one of its largest lenders which is China. However, what it has received is a mere damp squib as China has left Sri Lanka to fend for itself in this crisis period. This attitude of a country which claims to be a friendly nation to Sri Lanka is not only unbecoming of its economic prowess but is also reflective of its wily nature as China is highly complicit in bringing Sri Lanka to such a situation.
Contrary to IMF’s recommendation and regardless of India’s measures pertaining to Sri Lanka’s debt restructuring, China’s EXIM bank has offered Sri Lanka a mere 2-year debt moratorium instead of 10-year moratorium. This puts the IMF package of USD 2.9 billion to Sri Lanka in jeopardy due to Chinese debt moratorium conditions.
Between 2005 and 2015, China emerged as Sri Lanka’s leading source of FDI and development assistance. China saw the opportunity in investing in multiple mega infrastructure projects in Sri Lanka in order to gain a strategic advantage in the Indian Ocean region and to counter India’s heft in the South Asia region. On the other hand, Sri Lanka readily sought Chinese assistance given the quick disbursement of loans as well as indifference to Sri Lanka’s human rights record and domestic issues.
Sri Lanka owes more than USD 7 billion debt to China which includes loans from the Chinese Development Bank. If the private debt is included in this figure, the total debt will skyrocket even further. Moreover, these debts were given at unsustainably high-interest rates, owing to misgovernance and malfeasance by the Rajapaksa government.
Although several experts cautioned Sri Lanka against China’s salami-slicing strategy to entrap countries in a debt trap and gain territorial rights (for example, Sri Lanka had to lease its Hambantota port to China for 99 years after it became unable to service the USD 1.4 billion debt from Beijing it used to build it), however, Sri Lanka went ahead and led China to invest in several unsustainable projects. China preyed on Sri Lanka’s economic vulnerabilities, loopholes, and corrupt practices for its political and economic calculations.
When the debts became unserviceable on Sri Lanka’s part with its economic downfall, China shifted the blame to Sri Lanka for the depletion of its foreign exchange reserves and long-term economic mismanagement vis-à-vis unsustainable project proposals and borrowings.
Such a stance by China is not only unhelpful but smacks of its opportunistic behaviour. It is going to give further economic pain to the island nation which is already reeling under distress. Effectively, after using Sri Lanka for its own strategic gains, China has left Sri Lanka to fend for itself. This is a lesson to countries like Nepal, Bangladesh, Maldives and Myanmar to be wary of the repercussions before landing at China’s doorsteps for infrastructure and development funding.
