Sri Lanka has defaulted on its debt, plunging the island nation into its worst economic crisis since independence in 1948. In addition to fuel shortages, the country also faces the prospect of running out of food, staples and medicine. Public frustration over the deepening economic crisis has spilled over into raging street protests in recent months. President Gotabaya Rajapaksa, who has been accused of financial mismanagement, was forced to resign and fled abroad last week as anger at his government grew. Deputy President Ranil Wickremesinghe declared a state of emergency on Sunday in an attempt to quell protests ahead of a parliamentary vote on Wednesday to elect a new leader. China’s willingness to provide substantial debt relief to Sri Lanka will be crucial to speed up debt restructuring and help the country emerge from its current situation, said Umesh Moramudali, a lecturer at the University of Colombo. You cannot get out of this crisis without China. Umes Moramundali lecturer at the University of Colombo “You can’t get out of this crisis without China,” Moramudali said on CNBC’s “Streets Signs Asia” on Tuesday. “China must agree to restructure its debt, which is not its usual path.”
Belt and Road
China has invested billions in Sri Lanka under the Belt and Road Initiative. The massive infrastructure program began 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 insisting on is that China also agrees to a common framework for debt restructuring,” Moramudali added. “It is not yet clear what level of negotiations we are at, particularly with China.” At a regular press briefing last week, Chinese Foreign Ministry spokesman Wang Wenbin said that “shortly after the Sri Lankan government announced that it would suspend international debt payments, Chinese financial institutions approached the Sri Lankan side and expressed the their readiness to find an appropriate way to handle the arrears related to China and help Sri Lanka overcome its current difficulties.” People demonstrate 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 took over a strategic port in 2017 when Sri Lanka defaulted on its debt. Critics have blamed Beijing for what they call a “debt trap,” saying countries that owe China money could be forced to sign over national territory or make sharp concessions if they can’t pay. China denies these allegations. Sri Lanka said that as of April last year, China accounted for about 10% of its total debt, but Moramudali said that in reality this was probably not the case. “I mean that 10% is also an underestimate,” he said, stressing that further research provided a more accurate picture of China’s lending to Sri Lanka. “Sri Lanka [debt] to Chinese creditors comes about 20%, not really 10%. So this whole 20% will have to be restructured. That means you will have to look at how the China Development Bank will deal with the restructuring and the Exim bank of China will deal with the restructuring,” he added.
“Tragic Mistakes”
Sri Lanka has been unable to tap a $1.5 billion line of credit from China and has yet to receive a response to a request to China for a $1 billion loan, 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 it was in China’s interest to restructure Sri Lanka’s debt. While China is willing to perhaps engage in debt rollover or debt refinancing, it is unwilling to undertake restructuring because of the precedent it would set. Akhil Berry | Asia Society Policy Institute “China is, of course, a very important creditor of Sri Lanka. Sri Lanka is clearly unable to repay this debt. And I hope that China will be willing to work with Sri Lanka to restructure the debt – it will probably happen in both The interest of China and Sri Lanka,” Yellen told a news conference. Political observers point out that Sri Lanka is currently in a difficult position regarding the debt to China. “One of Sri Lanka’s tragic mistakes was in 2020, when the pandemic hit, it did not engage in restructuring negotiations with its creditors,” Akhil Bery, director of South Asia Initiatives at the Asia Society Policy Institute, told “Squawk Box Asia ” by CNBC. on Tuesday. He said it was known at the time that the debt was unsustainable. “The other slur that has come on behalf of Sri Lankan politicians is that China would come to their aid and restructure their loans,” Berry added. “While China is willing to participate in perhaps a debt rollover or debt refinancing, it is not willing to undertake restructuring because of the precedent it would set.”
IMF bailout
According to central bank data obtained by Reuters, Sri Lanka currently has about $2 billion in foreign exchange reserves against $7 billion in total debt maturing this year, including $1 billion worth of bonds maturing in July. Deputy President Wickremesinghe said on Monday that the country had almost completed talks with the International Monetary Fund on possible debt relief. Negotiations with the IMF “are nearing completion and discussions with donor countries are also progressing,” Wickremesinghe’s office said in a Twitter post. “THE [IMF] Negotiations will resume once a new government is in place. It’s not going to be done as quickly as the acting president says. I think we all have to recognize that because it will take maybe a few months to finalize the deal,” Moramudali said. In June, the IMF ended talks with Sri Lanka after failing to reach an agreement on a bailout package. “The IMF has been lenient during the pandemic,” Berry said. “He will seek some tough measures, including tax increases, including anti-corruption measures and even possibly central bank independence.”
