China becomes a wildcard in Sri Lanka’s debt crisis – The Diplomat
China says its initiative to build ports and other infrastructure across Asia and Africa, funded by Chinese loans, will boost trade. But in a cautionary tale for borrowers, Sri Lanka’s multibillion-dollar debt to Beijing threatens to hamper efforts to resolve a financial crisis so severe the Indian Ocean nation cannot import food or medicine. ‘essence.
Sri Lanka’s struggle is extreme, but it mirrors conditions in dozens of countries, from islands in the South Pacific to some of the poorest in Asia and Africa that have signed up to Chinese President Xi Jinping’s Belt and Road Initiative. . The total debt of poor countries is increasing, which increases the risks that others may run into trouble.
Sri Lanka’s 22 million people are in dire straits. Foreign currency ran out in April, leading to food shortages, power cuts and protests that forced a prime minister to resign. Payment of $51 billion in debt to China, Japan and other foreign lenders has been suspended.
Sri Lanka and other poor countries in Asia welcome Chinese funding. The Asian Development Bank says the region needs to invest $1.7 trillion a year in infrastructure to sustain economic growth. But some, including Sri Lankan critics of their government’s spending, say Chinese-led projects either cost too much or do too little for their economy.
China ranks third among Sri Lanka’s creditors after Japan and the AfDB and accounts for 10% of the debt, but Xi’s government has outsized potential to disrupt a settlement.
Beijing has promised to “play a positive role” in discussions with the International Monetary Fund on a possible emergency loan. China has offered to lend more, but has been reluctant to join in a process that could reduce Sri Lanka’s debt, perhaps for fear that other Belt and Road borrowers who owe tens of billions of dollars don’t require the same relief.
“If China grants a concession to Sri Lanka, it will have to grant the same concession to other borrowers,” said economist WA Wijewardena, former deputy governor of Sri Lanka’s central bank. “They didn’t want to get into this trouble.”
If China tries to avoid debt reductions, it could disrupt talks with the IMF or make private sector creditors wait for more money, experts say.
Beijing’s lack of cooperation “would complicate Sri Lanka’s debt collection process,” Aditi Mittal of Verisk Maplecroft, a consultancy, said in an email.
The United States, Japan, the European Union and other governments are also lending, but on a smaller scale. Many Belt and Road countries attract little non-governmental funding because they are deemed too risky or lack a legal framework to invest in infrastructure.
Some governments have encountered smaller crises. Truck drivers in Kenya protested after their government imposed a fuel tax to pay for a Chinese-built railway, whose drivers complained would be in competition with them.
Others have canceled or reduced projects. Malaysia scrapped a planned 2019 railway as too expensive before agreeing to a shorter, cheaper version of the project. Thailand has also renegotiated a high-speed railway following protests that too little work was being given to Thai companies.
China has restructured part of its debt. Ethiopia persuaded Beijing in 2018 to waive some interest and extend repayment of a 10-year loan for a $4 billion railway to 30 years. This reduced annual payments, but added two more decades of interest charges.
Chinese officials say the Belt and Road projects are business ventures, not aid. Most loans are granted on commercial terms. The details are often secret.
The Belt and Road Initiative angers Washington, Moscow, Tokyo, New Delhi and other governments, which blame Beijing, the largest trading partner of all its neighbors, for trying to expand its influence and undermine theirs.
Opposition figures say while Sri Lanka needs China to reduce its debt, blame lies with leaders who built unrealistic projects that cannot pay for themselves when they have not invested in economic development.
Foreign loans “have built highways, airports and convention centers in the jungle that have yielded no return” in foreign currency, MP Kabir Hashim said. “Now we don’t have the dollars to repay the dollar loans.”
Critics cite a Chinese-built port at Hambantota in the southeast as a prime example of official recklessness.
It was built in the hometown of President Mahinda Rajapaksa and paid for with $1.1 billion in Chinese loans despite the plan being rejected by a panel of experts.
Its promoters said Hambantota, on the busy Indian Ocean shipping lanes, would ease the burden of Sri Lanka’s main port at Colombo. But it failed to generate foreign revenue.
Beijing bailed out the port in 2017 by asking a state-owned company, China Merchants Group, to buy a 99-year lease for $1.1 billion. This includes land for an industrial park. The deal gave Sri Lanka money to repay Chinese banks, but drew accusations of official clumsiness giving a foreign government control of part of the country.
Chinese loans have also funded an international airport near Hambantota. Few airlines use it. The crisis has reignited accusations that Beijing used a “debt trap” to gain influence over the country.
“They knew we didn’t have the ability to repay,” said lawmaker Wijeyadasa Rajapakshe. “We have to convince China to give up at least part of the loans. The ordinary poor, without a meal a day, are paying this debt now.
Sri Lanka owes $7 billion this year to Chinese banks and other lenders, but suspended payment on April 13 while it talks with the IMF. The government also owes $25 billion, or about half of its total, to private sector bond investors.
A restructuring deal with China or Japan would be a “positive signal” for a recovery, Mittal wrote.
In a written response to questions, China’s Foreign Ministry said Beijing was ready to “play a positive role in easing Sri Lanka’s debt burden”, but gave no indication whether the amount owed could be reduced. “China is willing to help relevant financial institutions negotiate with Sri Lanka,” the ministry said.
In April, then-opposition leader Ranil Wickremesinghe told Republic TV that China had offered a billion-dollar loan instead of reducing Sri Lanka’s debt. This would allow the government to make payments, but the total due would increase.
Wickremesinghe took office as prime minister on May 12 after the resignation of Rajapaksa, who in a previous role as president built the port of Hambantota.
Chinese Ambassador Qi Zhenhong told reporters on April 25 that negotiating with the IMF would interfere with Beijing’s loan offer. The IMF generally requires a borrower to enter into an agreement with all creditors to reduce their debts.
China has avoided joining the London Club of government lenders, the forum for negotiating debt reductions, and has generally been more comfortable discussing debt relief in bilateral talks, rather than taking action. together with a group of creditors. However, as a first step, Beijing recently agreed to join an IMF-backed creditors’ committee to discuss Zambia’s debt restructuring.
Sri Lanka’s central bank governor has warned that China and other creditors must agree to the same terms. “It is not fair to treat one creditor differently from others,” said Nandalal Weerasinghe. “So the others won’t come on board.”
Even if Beijing balks, Sri Lanka cannot afford to alienate China, its biggest lender and potential investor, Wijewardena said.
“Sri Lanka is not in a position to say no,” he said.