How America Can Find Opportunity in Sri Lanka’s Debt Crisis

The lesson of the Russian-Ukrainian war is that the world badly needs American leadership in this era of global turmoil and great power rivalry. By providing billions of dollars in military equipment and humanitarian aid, the United States has been Ukraine’s bulwark against a Russian occupation of Kyiv, thereby preserving the foundation of the international world order that the “greater American generation strove to create in the midst of the ashes of the world. Second war.

With war still raging, the United States may need to export that lesson to another part of the globe, flexing its foreign policy muscles to help another nation critical to our security interests.

In Sri Lanka, the scene is one of utter misery. Years of economic mismanagement by the ruling Rajapaksa family have depleted the country of its foreign currency reserves and created sky-high inflation. Lines in the national capital of Colombo stretch for miles and people dump leftover amounts of food and cooking oil with kerosene. Violent protests have become a regular feature outside the president’s house, and without significant foreign aid and imports of essential supplies like food, gas and medicine, most Sri Lankans are likely to suffer. and many will die.

In Sri Lanka, as in Ukraine, the United States has a chance to reassert its role as the leader of a rules-based international order and provide a virtuous alternative to the revisionist machinations of autocratic societies like Russia and China. .

Sri Lanka, like many other developing countries in Asia-Pacific, has fallen victim to Chinese predatory lending under Xi Jinping’s Belt and Road Initiative (BRI), seeking to expand China’s influence by becoming a creditor friendly to the southern part of the world. . Over the past decade, Sri Lanka has racked up more than $11 billion in debt with this BRI, much of it on unprofitable “white elephant” projects with little benefit, including the Port of Hambantota in the southern part of the country, which has been leased to a Chinese conglomerate for ninety-nine years due to the Sri Lankan government’s inability to service its debt. These loans, unlike those granted by Western governments and institutions, often have predatory repayment structures, with interest rates exceeding 4% (compared to around 1% for an Organization for Economic Co-operation and Development creditor) and repayment periods of only ten years (OECD creditors average twenty-eight years).

Now, with Sri Lanka in the midst of its worst economic crisis in seventy years and foreign exchange reserves totaling less than $50 million, the country has no choice but to default on all loan repayments. its foreign debt. The government, led by President Gotabaya Rajapaksa of the powerful Rajapaksa family, has reached out to China for $2.5 billion in emergency aid. Xi, in turn, responded with a curt “no, thank you” and sent a measly $31 million in emergency humanitarian aid. The Chinese Foreign Ministry has also rejected all requests from the Sri Lankan government to restructure its debts.

These are not the actions of a “friendly creditor”, but rather characteristics of China’s “debt trap diplomacy”. Keeping an eye on its global image, the Chinese Communist Party is wary of making concessions on the terms of its loans, in the name of the precedent it would set with other developing countries seeking debt cancellation. Chinese lenders circle Sri Lanka like vultures, waiting for the small island nation to crack under the strain of its economic situation and agree to debt-for-equity swaps, where past loans would be converted into Chinese control of major development projects. infrastructure – much like the Port of Hambantota fiasco. China uses these loans not to enrich the lives of Sri Lankans, but to make profits and access natural resources.

It’s important for America to show that there are better options available. Unlike Chinese loans which prioritize profit, bridging loans and rapid assistance from international financial institutions and bilateral partners are designed to put the people of Sri Lanka first. The International Monetary Fund, headquartered in Washington and whose largest voting member is the United States, is expected to accelerate the use of funds from its Rapid Financing Instrument (RFI), which would cover balance of payments problems at short term and provide for the necessary purchases. The IMF should also make its Extended Financing Facility (EFF) available to further support humanitarian efforts and ensure that the necessary structural reforms are implemented. In total, these funds could represent a financial assistance of 600 million dollars, a big step towards closing the 6 billion dollar shortfall needed to cover short-term debts and replenish foreign exchange reserves.

Beyond the IMF, however, the United States can do much more to help the people of Sri Lanka. A starting point would be to relaunch the Millennium Challenge Corporation’s (MCC) $480 million Compact with the government of Sri Lanka. MCC’s board approved these funds in April 2019, but was rejected by the government of Sri Lanka over “sovereignty issues”. These funds would help reduce poverty through economic growth, improving transport and providing secure land titles to Sri Lankan farmers. Showing a willingness to revive this pact would signal to the people of Sri Lanka that America is ready to help and be a force for good in the long-term betterment of Sri Lankan society.

Congress should also consider passing legislation to provide direct humanitarian aid to the people of Sri Lanka. This could include direct aid channeled through the United States Agency for International Development (USAID), as well as language mandating the Treasury Department to obtain debt relief from Sri Lanka, both the debt owed to the United States and its allies. This is important because, although the United States is not a major creditor of Sri Lanka, Japan, a friend and security partner of the United States, currently holds 10% of Sri Lanka’s debts. Working with Japan to reduce this burden can go a long way to correcting Sri Lanka’s insolvency.

There is a lot at stake in resolving Sri Lanka’s debt crisis. The island nation is strategically located in the middle of the Indian Ocean and more than 60,000 vessels pass near its territorial waters each year, accounting for more than 24% of container traffic in the South Asia region. America and Japan, duly cooperating to create a Free and Open Indo-Pacific (FOIP), must consider the importance of a stable and economically prosperous Sri Lanka to its broader national security interests. Being cold now would only push the nation further into China’s sphere of influence, and with it only more debt and desperation. It is time for America to resume its role as a global superpower, reassured of its status as the greatest guarantor of peace on Earth, and it can start by using the institutions it has created to help the people of Sri Lanka.

Harrison Nugent is a JD candidate at Stanford Law School and a Henry Luce Asia Scholar working at the Nakasone Peace Institute in Tokyo.

Picture: Reuters.