Sri Lanka calls for Chinese debt restructuring amid crisis

by Krishna Francis | The Associated Press

Colombo, Sri Lanka – The president of debt-ridden Sri Lanka on Sunday asked China to restructure its debts and access preferential loans to import essential goods, as the island nation struggles through its worst economic crisis, partly causally. For projects financed by Beijing that do not generate revenue.

President Gotabaya Rajapaksa told Chinese Foreign Minister Wang Yi that it would be “a great relief to the country if the restructuring of loan repayments can be looked at as a solution to the economic crisis caused by the COVID-19 pandemic,” his According to a statement from the office.

Rajapaksa asked Wang for a concessional credit facility for imports so that the industry could run smoothly, the statement said. He also requested assistance to enable Chinese tourists to travel to Sri Lanka within a safe bubble.

Wang and Prime Minister Mahinda Rajapaksa, the president’s brother, later visited Colombo’s Port City, a reclaimed island developed with Chinese investments, where they opened a resort and marked 65 years of diplomatic ties between the two countries. Inaugurated the sailing of 65 boats to celebrate.

In his speech in the port city, Wang said that a persistent and uncontrolled epidemic has made economic recovery difficult and that the two countries should celebrate the anniversary of diplomatic relations by working together.

He neither elaborated nor announced any relief measures.

Wang arrived in Sri Lanka on Saturday on the final leg of a multinational trip from the Maldives, which also took him to Eritrea, Kenya and the Comoros in East Africa.

Sri Lanka is facing one of its worst economic woes, with foreign reserves at around $1.6 billion, barely enough for a few weeks of imports. It also has foreign debt obligations of more than $7 billion in 2022, including $500 million in January and $1 billion in bond repayments in July.

Depleting foreign reserves are partly to be blamed on infrastructure projects built from Chinese debt that do not make money. China borrowed money to build a port and airport in the southern Hambantota district, in addition to an extensive network of roads.

Central Bank figures show that current Chinese debt to Sri Lanka is about $3.38 billion, excluding loans to state-owned businesses, which are accounted for separately and considered substantial.

“Technically we can claim that we are now bankrupt,” said lead researcher Muttukrishna Sarvanathan, from the Point Pedro Institute of Development. “When you have your net external foreign assets in the red, it means you are technically insolvent.”

The situation has left the families in dire straits. People wait in long lines to buy essential items like milk powder, cooking gas and kerosene. Prices have risen sharply, and the central bank says inflation has risen to 12.1% by the end of December, up from 9.9% in November. Food inflation rose to over 22% during the same period.

Due to paucity of money, importers are unable to clear their goods containing essential commodities and manufacturers are unable to purchase raw materials from abroad.

Overseas remittances have also fallen after the government ordered a mandatory conversion of foreign currency and exchange rate controls.

Sri Lanka has lost much of its borrowing power as a result of the rating agency downgrade. In December, Fitch Ratings noted the increasing likelihood of credit defaults.

The Central Bank has added $1.5 billion worth of currency swaps to Chinese currency, but economists disagree on whether this can be part of foreign reserves.

Wang’s visit has rekindled regional power struggles between China and India, Sri Lanka’s nearest neighbor which considers the island part of its domain.

Before Wang spoke with Sri Lankan leaders, the country’s top Indian diplomat on Sunday morning inaugurated a train service from a station near Colombo to the north using coaches provided through the Indian loan facility.

A statement from the Indian embassy quoted Vinod Jacob as saying that “relations with Sri Lanka were accorded priority in line with the ‘neighborhood first’ policy by Indian Prime Minister Narendra Modi.”

He said the recent statement by External Affairs Minister S Jaishankar that India will support Sri Lanka in difficult times is a confirmation of that policy in the present context.

“We can see that Sri Lanka is embroiled in a tussle between India and China over a possible relief package,” said political analyst Ranga Kalanasuriya.

“India has been dragging its feet for some time while China is trying to maximize the situation,” he said.

China regards Sri Lanka as an important link in its Belt and Road global infrastructure initiative. Relations were strained recently over a shipment of Chinese fertilizer that allegedly contained harmful bacteria, and trade agreements that China had with rivals, the United States and India.