China’s delays in restructuring the debt have put Sri Lanka in an awkward position.
As Sri Lanka embarks on debt restructuring negotiations with key lenders in parallel to the International Monetary Fund (IMF) initiatives, it is useful to consider China’s importance as one of Sri Lanka’s top lenders.
China has so far not joined the common platform of negotiators on Sri Lanka’s debt restructuring, though it has joined as an observer.
In response to Sri Lanka’s request for long-term relief from major creditors like India, Japan, and China, the Chinese Exim Bank has agreed to grant Sri Lanka a two-year moratorium. It said it would support the country’s efforts to secure a $2.9 billion loan from the International Monetary Fund. This is according to a report by Reuters.
On the contrary, India has promised to grant a twelve-year debt moratorium to Sri Lanka to repay India’s loans. This was announced by the Export Credit Guarantee Corporation of India.
As a result of China’s reluctance to join the other creditors, such as India, Japan, the Paris Club, and non-Paris Club donors, Sri Lanka had to have separate bilateral talks with China. However, Foreign Minister Ali Sabry, who toured China recently and met with his counterpart in Beijing, said that Finance Ministry Secretary Mahinda Siriwardene would lead a delegation to China for talks on the same lines as Sri Lanka continues to hold with other bilateral lenders on a common platform.
In the meantime, Sri Lanka invariably had to dig into poor people’s superannuation funds to ensure debt sustainability. This is key to the economic reforms proposed by the International Monetary Fund.
Against this backdrop, how China deals with Sri Lanka will be crucial to the trajectory and timing of Sri Lanka’s debt restructuring. It would, in turn, be of some importance to the country’s path towards debt sustainability and economic recovery.
The International Monetary Fund (IMF) believed Sri Lanka should engage proactively with China on a debt restructuring. This is in addition to the IMF talks in parallel.
It is imperative to pay attention to China’s stance, which has fundamental differences in how it treats debt relief or debt restructuring. This is true for other countries that face debt sustainability issues and debt distress.
China’s approach seemed to lack cohesiveness compared to the approach taken by other lenders working on an agreed-upon programme.
Under the circumstances, it is reasonable to think that China would seek personalised negotiations and preferential treatment in Sri Lanka’s debt restructuring. It should, however, be avoided at any cost by both China and Sri Lanka at a time when Sri Lanka is engaged in extensive negotiations with other creditors. President Ranil Wickremesinghe also emphasised that there could not be talks with China on a different footing. Instead, talks would be conducted on the same principles and guidelines set forth by the other negotiators and Sri Lanka.
In his view, Foreign Minister Ali Sabry believes that, since China took part in the negotiations as an observer, it would not be difficult to conduct friendly talks with it, though China has taken a somewhat tough stance compared to other countries.
Last year, in July, Speaking at the G20 finance officials meeting in Indonesia, US Treasury Secretary Janet Yellen said, “Sri Lanka is unable to repay that debt, and I hope that China will be willing to work with Sri Lanka to restructure the debt.” Zambia, Ethiopia, and Chad have also applied for help with their debt, but their efforts have stalled “largely due to foot-dragging by China.” It was “quite frustrating” that China was not stepping up on the debt issues, explained Yellen.
This push for G20 creditors to finalise debt restructurings is one of the most critical goals. This would eventually stabilise nations like Sri Lanka and other developing countries facing debt issues.
IMF Managing Director Kristalina Georgieva explained that “strong global leadership is also needed to tackle the scourge of high debt, which has reached multiyear highs.” More than 30 percent of emerging and developing countries are in or near debt distress; for low-income countries, that number rises to 60 percent. With tightening financial conditions and exchange rate depreciation, the debt service burden is harsh and sometimes unbearable, says Georgieva.
Sri Lanka’s high inflation rate has put not only the low-income groups but also the middle class in a spin, unable to bear the cost of living with skyrocketing price tags on essential food and medicine. People have no remedy in an import-driven economy like Sri Lanka except to look for help from outside.
India’s neighbourly policy helped stabilise Sri Lanka with $4 billion in swaps and aid.
China was quite reluctant to respond positively other than sending humanitarian aid to Sri Lanka while the country is saddled with numerous issues, the economic meltdown being the foremost.
However, China has offered another loan to cushion the existing debt. In the circumstances, Sri Lanka has asked for one billion dollars to pay Chinese debt. It also asked for a $1.5 billion credit line to pay for Chinese imports and a swap of 1.5 billion US dollars. This amounts to $4 billion.
Besides,Sri Lanka’s creditors want the IMF to treat all creditors equally, including China.
Samantha Power, the Administrator of the United States Agency for International Development (USAID), noted that the “most pressing question of all is whether Beijing will restructure its debt to the same extent as other bilateral creditors”. Sri Lanka is just one of many developing countries where, between 2000 and 2017, debt to China increased tenfold, from $500 billion to over $5 trillion.
If more nations like Sri Lanka defaulted, China would have to bear this extra burden and re-evaluate its BRI strategy. The consequences of such a shift could redefine BRI nations’ futures. Hence it would not be easy for china to stave off the burden of helping countries saddled with debt distress.
Meanwhile, Indian Deputy High Commissioner Vinod K. Jacob, participating in the inauguration ceremony of the Construction, Power, and Energy Expo 2023 in Colombo, said
“The past three years have demonstrated the close links between India and Sri Lanka. In line with the Neighbourhood First policy of the Government of India, the Indian High Commission has steadfastly supported the economic and social ministries of Sri Lanka. This has been done as they navigated the challenges of the COVID pandemic, the financial crisis, and the political upheavals during this period.
India’s financial and humanitarian support worth USD 4 billion is far above the IMF’s total Extended Fund Facility. We were the first creditor nation in January this year to provide the financing assurances needed to kick-start the IMF process. India will continue to play a constructive role as Co-Chair of the Creditors Committee, along with Japan and the Paris Club.
The visit of External Affairs Minister Dr. S. Jaishankar to Sri Lanka in January this year opened up avenues for further cooperation between the two countries. The modus operandi was investment in infrastructure, manufacturing, and connectivity. India was Sri Lanka’s largest trading partner in 2022. At the same time, exports from Sri Lanka to India have also grown. The use of Rupees for trade settlement helps the Sri Lankan economy stay afloat. These are steps that will help with economic recovery and growth in Sri Lanka. Jacob asserted.
I am glad to note that India was once again the largest source of tourists for Sri Lanka last year, with over 100,000 tourists. It continues to top the chart this year. Around one in five to six tourists in Sri Lanka is an Indian.
The resumption of Chennai-Jaffna flights is yet another step in bringing the two countries closer. Ferry services between the two countries will further boost this trend. Connectivity is a force multiplier in this context. It will complement the flagship development cooperation partnership, which has given utility services to the public like the Suwaseriya 1990 Ambulance, the Indian Housing Project, the reconstruction of schools, the construction of hospitals, and other socio-economic projects.
Recent developments in India-Sri Lanka ties have strengthened our friendship and cooperation. At the same time, the two countries also remain vigilant so that both countries can tackle common challenges, especially in the maritime security domain.
I hope the Expo participants will keep this background in mind and strive to deepen the India-Sri Lanka friendship. The relationship between the two countries is currently at its highest point in 75 years. We have reached this stage because India’s people, business circles, and government have resolved to stand by Sri Lanka at this time.
All in all, Sri Lanka and India seem to have renewed their ties to tackle common issues together. This is to create a better socio-economic environment for the Indian Ocean countries.
