Sri Lanka Debt Crisis: Why is China keeping Sri Lanka in limbo on the issue of debt relief?

Sri Lanka and Pakistan were the poster boys of China’s Belt Road Initiative (BRI) over the past decade and used high-interest loans from Beijing to build these white elephant projects. Both the countries are bankrupt today, while China is no longer showing the same enthusiasm towards BRI to revive its economies to deal with the growing food and fuel crisis. The economic crisis in these two countries is a lesson for Nepal, Bangladesh, the Maldives and Myanmar, whose political leadership often knocks on Beijing’s door for infrastructure funding.

Last year, the International Monetary Fund sanctioned a loan of $ 2.9 billion to Sri Lanka on the condition that to get this amount, Sri Lanka would have to get assurances from its old creditors for relief in the debt repayment deadline. Last week, India became the first country to give such an assurance to Sri Lanka. After that the news came that China has also assured to give relief to him. The Export-Import Bank of India has given in writing that its financing and debt relief to Sri Lanka will be in line with the IMF and the Paris Club. The Export-Import Bank of China has made it clear to Colombo that it will only provide repayment. The IMF and the Paris Club have recommended that Sri Lankan debt should be restructured over 15 years. This means that the IMF package of USD 2.9 billion (with six monthly reviews over four years) for Sri Lanka in March is in jeopardy due to conditions at the Chinese Exim Bank. The only other option is to allow the IMF to loan Sri Lanka on sovereign bailouts to save it from complete economic and political chaos.

China owes at least US$7 billion to Sri Lanka, including loans from the China Development Bank, a number that would reach another level if private debt were also included. The unsustainable high-interest debt is due to financial mismanagement and mismanagement by the Rajapaksa regime, of which current President Ranil Wickremesinghe was also a significant part in the past. Thanks to financial extravagance by the Rajapaksa, Chinese high-interest money was used to build unsustainable white elephant projects across the country, including Hambantota Port, Mattala Rajapaksa International Airport and Norocholai Power Station. The widespread public resentment against the Rajapaksa in 2022 allowed ultra-left political parties to rise in the island nation. Basically, like in Pakistan, the political disaster is worse than the economic disaster.

India, in its letter to IMF Executive Director Kristalina Georgieva dated January 16, 2023, made it clear that it would fully support the debt sustainability analysis by the IMF and the Paris Club without any additional conditions. However, the Modi government made it clear that the Sri Lankan authorities should seek equal debt treatment from all commercial creditors and other official bilateral creditors, as well as substantial financing contributions from multilateral development banks. A copy of India’s letter to the IMF was also sent to the Finance Ministry of Sri Lanka. The Indian letter along with the Paris Club is committed to continue negotiations with the Government of Sri Lanka on long-term debt treatment through maturity extension and interest rate reduction or any other financial operation that would provide similar financing/debt relief.