Sri Lanka appeals to China for debt restructuring amid financial crisis

Saddled with loan repayments, the island country has asked China for access to preferential credit for imports of essential goods

Sri Lankan Prime Minister Mahinda Rajapaksa, right, welcomes Chinese Foreign Minister Wang Yi during their meeting in Colombo, Sri Lanka on Sunday. Photo: EPA

The president of Sri Lanka on Sunday asked China for the restructuring of its loans and access to preferential credit for imports of essential goods, as the island nation struggles in the throes of its worst economic crisis.

President Gotabaya Rajapaksa told visiting Chinese Foreign Minister Wang Yi that it would be "a great relief to the country if attention could be paid on restructuring the debt repayments as a solution to the economic crisis that has arisen in the face of the Covid-19 pandemic”, his office said.

Mr Rajapaksa asked Mr Wang for a concessionary credit facility for imports so that industries can run without disruption, the office said. He also requested assistance to enable Chinese tourists to travel to Sri Lanka within a secure bubble.

When you have your net external foreign assets have been in the red, that means you are technically bankrupt

Muttukrishna Sarvananthan,
principal researcher, Point Pedro Institute of Development

Mr Wang and Prime Minister Mahinda Rajapaksa, the president's brother, later visited Colombo’s Port City, a reclaimed island developed with Chinese investment, where they opened a promenade and inaugurated the sailing of 65 boats to commemorate the 65 years of diplomatic relations between the two countries.

In his speech at the Port City, Mr Wang said a persistent and unchecked pandemic has made economic recovery difficult and the two countries must take the anniversary of the diplomatic ties to work closer together.

He did not elaborate nor announce any relief measures.

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

Sri Lanka faces one of its worst economic crises, with foreign reserves down to about $1.6 billion, barely enough for a few weeks of imports. It also has foreign debt obligations exceeding $7bn in 2022, including repayment of bonds worth $500 million in January and $1bn in July.

The declining foreign reserves are partly blamed on infrastructure projects, which were built on loans and don’t provide adequate return on investments. China lent money to build a seaport and airport in the southern Hambantota district, in addition to a wide network of roads.

Central Bank figures show that current Chinese loans to Sri Lanka total around $3.38bn, not including loans to state-owned businesses, which are accounted for separately and thought to be substantial.

“Technically we can claim we are bankrupt now,” said Muttukrishna Sarvananthan, principal researcher at the Point Pedro Institute of Development. “When you have your net external foreign assets have been in the red, that means you are technically bankrupt.”

The situation has left households grappling with severe shortages. People wait in long lines to buy essential goods like milk powder, cooking gas and paraffin. Prices have increased sharply and the central bank says the inflation rate rose to 12.1 per cent by the end of December from 9.9 per cent in November. Food inflation increased to over 22 per cent in the same period.

Because of a currency shortage, importers are unable to clear their cargo containing essentials and manufactures are not able to buy raw materials from overseas.

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

Ratings agency downgrades have resulted in Sri Lanka losing much of its borrowing power. In December, Fitch Ratings noted an increased probability of credit default.

The central bank has added a currency swap in Chinese currency worth $1.5bn to the reserves, but economists disagree whether it can be part of foreign reserves.

Mr Wang's visit has again highlighted the regional power struggle between China and India, Sri Lanka’s closest neighbour that considers the island part of its domain.

Before Mr Wang spoke with Sri Lankan leaders, the top Indian diplomat in the country on Sunday morning inaugurated a train service from a station near Colombo to the north using compartments provided through an Indian loan.

The Indian embassy quoted Vinod Jacob as saying “the priority placed by Indian Prime Minister Narendra Modi on ties with Sri Lanka in line with the ‘Neighbourhood First’ policy'”.

He said that a recent statement by India's External Affairs Minister S Jaishankar that India would support Sri Lanka in difficult times was an affirmation of that policy in the current context.

“We can see Sri Lanka being saddled between India and China for a potential bailout package,” said political analyst Ranga Kalansooriya.