Sri Lanka will not be able to solve its debt restructuring problems without the help of China, as the country is on the brink of economic collapse, according to analysts.
Sri Lanka has defaulted on its debt, plunging the island nation into its worst financial crisis since independence in 1948. In addition to fuel shortages, the country also faces the prospect of running out of food, staples and medicines.
Public frustration over the ever-deepening economic crisis has spread to furious street protests in recent months. President Gotabaya Rajapaksa, who has been blamed for the financial mismanagement, was forced to withdraw and fled abroad last week when anger against his government spiraled.
Acting President Ranil Wickremesinghe declared a state of emergency on Sunday, in an attempt to stop protests before a vote in parliament on Wednesday to elect a new leader.
China’s willingness to provide significant debt relief to Sri Lanka will be crucial in speeding up debt restructuring and helping the country recover from its current situation, said Umesh Moramudali, a lecturer at the University of Colombo.
“You can not get out of this crisis without China,” Moramudali told CNBC’s “Streets Signs Asia” on Tuesday. “China must agree to restructure its debt, which is not their usual way to go.”
Belt and road
China has invested billions in Sri Lanka during its 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 must come to a common framework, and the international community insists that China also accepts a common framework for a debt restructuring,” Moramudali added. “It is not entirely clear yet what level of negotiations we are in, especially with China.”
At a regular press conference last week, Chinese Foreign Ministry spokesman Wang Wenbin said that “shortly after the Sri Lankan government announced the suspension of international debt payments, Chinese financial institutions reached out to the Sri Lankan side and expressed their willingness to find a proper way to deal with the default. debt related to China and help Sri Lanka overcome the 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 took over a strategic port in 2017 when Sri Lanka was unable to service its debt.
Critics have accused Beijing of what they call a “debt trap”, saying countries that owe money to China could be forced to sign national territory or make big concessions if they cannot pay. China denies these allegations.
Sri Lanka said that from April last year, China accounted for about 10% of the total debt, but Moramudali actually said that is probably not the case.
“I believe that these 10% are also an underestimation,” he said, emphasizing that further research provided a more accurate picture of China’s lending to Sri Lanka.
“Sri Lankas [debt] to Chinese creditors comes about 20%, not really 10%. So all these 20% need to be restructured. That means you have to look at how China Development Bank will handle restructuring and China Exim Bank will handle restructuring, he added.
Sri Lanka could not use a $ 1.5 billion credit line from China and has not yet responded to China’s request for a $ 1 billion loan, former President Rajapaksa said in June. according to a Bloomberg report.
At last week’s group at the 20th meeting, US Treasury Secretary Janet Yellen said it was in China’s interest to restructure Sri Lanka’s debt.
“China is, of course, a very important creditor to Sri Lanka. Sri Lanka is clearly unable to repay that debt. And it is my hope that China will be willing to work with Sri Lanka to restructure the debt – it will probably be in the interest of both China and Sri Lanka, “Yellen said at a news conference.
Political observers emphasize that Sri Lanka is currently in a tough situation due to debt to China.
“One of Sri Lanka’s tragic mistakes was in 2020 when the pandemic hit, it did not participate in restructuring negotiations with its creditors,” Akhil Bery, director of the South Asia Initiatives at the Asia Society Policy Institute, told CNBC’s “Squawk Box Asia” on Tuesday.
He said it was known at the time that the debt was unsustainable.
“The other hubris that came on behalf of Sri Lankan politicians is to believe that China would come to their aid and restructure their loans,” Bery added.
“While China is willing to perhaps engage in a debt transfer or debt refinancing, it is not willing to take on restructuring because of the precedent it will create.”
IMF rescue operation
According to central bank data obtained by Reuters, Sri Lanka currently has around $ 2 billion in foreign exchange reserves against $ 7 billion in total debt maturing this year, including banknotes worth $ 1 billion maturing in July.
Acting President Wickremesinghe said on Monday that the country had almost ended talks with the International Monetary Fund for a possible debt relief.
Negotiations with the IMF “are coming to an end, and discussions with donor countries are also moving forward,” Wickremesinghe’s office said. in a twitter post.
“The [IMF] Negotiations will resume when there is a new government. It will not be concluded as quickly as the acting president says. I think we all have to acknowledge that because it will take maybe a couple of months to complete the agreement, Moramudali said.
In June, the IMF ended talks with Sri Lanka after failing to reach an agreement on a rescue package.
“The IMF was mild during the pandemic,” Bery said. “It will look for some stringent measures, including raising taxes, including anti-corruption measures and even possibly central bank independence.”