According to analysts, Sri Lanka will not be able to solve its debt restructuring problems without help from China when the country is on the brink of economic recession.
Sri Lanka has defaulted on its debtplunging the island nation into its worst financial crisis since independence in 1948. In addition to fuel shortages, the country faced the prospect of running out of food, food and medicine.
Public frustration over the deepening economic crisis has spilled over into mass street protests in recent months. President Gotabaya Rajapaksa, who is blamed for economic mismanagement, was forced to resign and flee abroad last week. his anger towards his government grows.
Acting President Ranil Wickremesinghe declared a state of emergency on Sunday, in an attempt to quell protests ahead of Wednesday’s parliamentary vote to elect a new leader.
Umesh Moramudali, a lecturer at the University of Colombo, said China’s willingness to provide substantial debt relief to Sri Lanka would be crucial to speeding up the debt restructuring process and helping the country get out of the situation. present.
You cannot get out of this crisis without China.
Umesh Moramudali
Lecturer, University of Colombo
“You can’t get out of this crisis without China,” Moramudali told CNBC’s “Streets Signs Asia” on Tuesday. “China needs to agree to debt restructuring, this is not their usual path.”
Belt and Road
China has invested billions of dollars in Sri Lanka under the Belt and Road Initiative. The massive infrastructure program was launched in 2013 and aims to build ports, roads, railways and pipelines across Asia, Europe and Africa.
“Sri Lanka needs to come to a common framework and what the international community is emphasizing is that China also agrees to a common framework for debt restructuring,” Moramudali added. “It’s still not clear what level of negotiations we are at, especially with China.”
At a regular press conference last weekChinese Foreign Ministry spokesman Wang Wenbin said “immediately after the Sri Lankan government announced the suspension of international debt payments, Chinese financial institutions contacted the Sri Lankan side and expressed their willingness to find an appropriate way to deal with China-related maturing debts and help Sri Lanka overcome its current difficulties.”
People march in Colombo on July 9, 2022 to protest the ongoing economic crisis in Sri Lanka.
Akila Jayawardana | NurPhoto via Getty Images
In a high-profile case, Beijing takes over a strategic port in 2017 when Sri Lanka defaulted on its debt.
Critics have accused Beijing of what they call a “debt trap,” saying countries that owe China money could be forced to sign on national territory or make strict concessions if they can’t pay. end. China denies those allegations.
Sri Lanka said that as of April last year, China accounts for about 10% of total debtbut Moramudali said that in fact maybe not so.
“I mean this 10% is also an underestimation,” he said, emphasizing that more research provided a more accurate picture of China’s lending to Sri Lanka.
“Of Sri Lanka [debt] Chinese creditors account for about 20%, not exactly 10%. So all these 20% will have to be restructured. That means you will have to see how China Development Bank will deal with the restructuring and how China’s Exim bank will deal with the restructuring,” he added.
‘Tragic mistake’
Sri Lanka is unable to tap a $1.5 billion credit line from China and has yet to receive a response to a request for a $1 billion loan to China, former president Rajapaksa said in June, according to a Bloomberg report.
At the Group of 20 meeting last week, US Treasury Secretary Janet Yellen said China was interested in restructuring Sri Lanka’s debt.
While China may be willing to engage in debt rollback or debt refinancing, it is unwilling to restructure because of the precedent it will set.
Akhil Bery
Asian Institute of Social Policy
“Of course, China is a very important creditor to Sri Lanka. Sri Lanka is clearly unable to repay that debt. And I hope that China will be willing to work with Sri Lanka to restructure the loan. debt – maybe both Chinese and Sri Lankan interest,” Yellen said at a press conference.
Political observers emphasize that Sri Lanka is currently in a difficult position because of its debt to China.
“One of the tragic mistakes of Sri Lanka is that in 2020 when the pandemic hit, the country did not participate in the restructuring of negotiations with creditors,” said Akhil Bery, Director of Initiatives South Asia at the Asian Institute of Social Policy, told CNBC “Squawk Box Asia” on Tuesday.
He said he knew at the time that the debt was unsustainable.
Bery added: “Other arrogant people on behalf of Sri Lankan politicians believe that China will help them and restructure their loans.
“While China may be willing to engage in debt rollback or debt refinancing, it is not willing to restructure because of the precedent it will set.”
IMF bailout
According to central bank data collected by ReutersSri Lanka now has about $2 billion in foreign exchange reserves compared to $7 billion in total debt due this year, including $1 billion in bonds maturing in July.
Acting president Wickremesinghe said on Monday that the country had almost concluded negotiations with the International Monetary Fund to possibly write off its debt.
Negotiations with the IMF “are coming to an end and discussions with donor countries are also progressing,” Wickremesinghe’s office said. in a twitter post.
“The [IMF] Negotiations will continue when a new government is in place. It will not be concluded as quickly as the powerful president says. I think we all need to acknowledge that because it will probably take several months to finalize the deal,” Moramudali said.
In June, the IMF concluded negotiations with Sri Lanka after inconclusive a deal for a bailout.
“The IMF has been tolerant during the pandemic,” Bery said. “It will seek a number of stringent measures, including tax increases, including anti-corruption measures and possibly even central bank independence.”
