New Delhi: With China suddenly stepping in to lead Sri Lanka’s debt restructuring process taking the island nation’s other creditors, including India, by surprise, Beijing has made it clear it intends to keep Colombo in its hold.
“The Government of the Democratic Socialist Republic of Sri Lanka is pleased to announce that it has reached an agreement on the key principles and indicative terms of a debt treatment with the Export-Import Bank of China (China Exim bank),” Sri Lanka’s finance ministry said in a statement. “The agreement in principle covers approximately $4.2 billion of outstanding debt. It constitutes a key step towards restoring Sri Lanka’s long-term debt sustainability and will pave the way to a prompt economic recovery.”
After several years of mismanagement, corruption, short-sighted policies and overall lack of good governance, Sri Lanka announced in April last year that it has failed to repay its foreign debt totalling $83 billion. Then President Gotabaya Rajapaksa’s pushing through some of the biggest tax cuts in the country’s history ahead of the 2019 elections further aggravated the situation. Adding to the woes was the COVID-19 pandemic. Borrowing from China for infrastructure projects like highways, an airport, and a seaport that did not attract expected business opportunities was another factor.
The country’s economy plunged into a crisis leading to severe shortages of food, fuel and other necessities. This sparked mass protests leading to the ouster of Rajapaksa in July 2022.
Sri Lanka approached the International Monetary Fund (IMF) for a bailout package. In September last year, the island nation qualified for a $2.9-billion IMF bailout package. The first tranche of $330 million of this package came through in March this year. However, the IMF set a condition that the loan would be based on Colombo securing assurances for debt sustainability from its other creditors. This meant that negotiations should be held with creditor countries for the extension of debt repayment periods and reduction in loan interest rates.
According to the finance ministry, Sri Lanka’s total foreign debt as of March 2023 was SLR36.4 billion. According to the IMF debt sustainability targets, Sri Lanka plans to reduce its overall debt by almost $17 billion. Out of that, $11.3 billion was bilateral debt. Sri Lanka has also sought a 30 per cent haircut of its total outstanding debt from its foreign creditors.
As of March 2023, Sri Lanka owed $4.7 billion to China, $1.74 billion to India, and $2.68 billion to Japan. Apart from this, Sri Lanka had an outstanding debt of $5.65 billion with the Asian Development Bank (ADB) and $3.88 billion with the World Bank.
While India and Japan, along with France, had formed a common platform to negotiate with Sri Lanka for debt restructuring, China had remained as an observer. Last month, a debt restructuring deal between Sri Lanka and countries like India, France and Japan was expected but it did not work out.
Now, with China suddenly stepping out to lead Sri Lanka’s debt restructuring process, other creditors, including the IMF, were caught by surprise. According to the finance ministry statement, the new deal with China “will provide an anchor” to the country’s ongoing engagement with the Official Creditor Committee and commercial creditors, including the bondholders.
“It should also facilitate approval by the IMF Executive Board of the first review of the IMF-supported programme in the coming weeks, allowing for the next tranche of IMF financing of about $334 million to be disbursed,” it stated. So, so how come China has suddenly come to the forefront to help Sri Lanka?
“China wants to keep its control over Sri Lanka,” Anand Kumar, Associate Fellow in the Manohar Parrikar Institute of Defence Studies and Analyses, told ETV Bharat. “Earlier, it was said that China has put Sri Lanka in a debt trap,” Kumar said. “But China wanted to shake off that image while keeping its hold on Sri Lanka.”
He said that with Beijing’s latest move, the struggle between India and China to retain influence over this strategically important Indian Ocean region will continue.
