Sri Lanka will not be able to solve its debt restructuring problems without help from China as the country is on the brink of economic collapse, analysts say.
Sri Lanka defaulted on its debtplunging the island nation into its worst financial crisis since independence in 1948. Apart from fuel shortages, the country also faces the prospect of running out of food, basic commodities and medicine.
Public frustration over the worsening economic crisis has turned into raging street protests in recent months. President Gotabaya Rajapaksa, who has been blamed for economic mismanagement, was forced to resign and flee abroad last week as anger against his government soared.
Interim President Ranil Wickremesinghe declared a state of emergency on Sunday, in a bid to quell protests ahead of a vote in parliament on Wednesday to elect a new leader.
China’s willingness to provide substantial debt relief to Sri Lanka will be key to accelerating debt restructuring and helping the country out of its current predicament, said Umesh Moramudali, senior lecturer at the University of Colombo.
“You can’t 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 path.”
China has invested billions in Sri Lanka under 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 needs to come to a common framework and what the international community is insisting on is that China also agree to a common framework for debt restructuring,” Moramudali added. “It’s not quite clear yet, what level of negotiation we are at, especially with China.”
At a regular press briefing last weekChinese Foreign Ministry spokesman Wang Wenbin said that “soon after the Sri Lankan government announced the suspension of international debt payments, Chinese financial institutions contacted the Sri Lankan side and expressed their willingness to find an appropriate way to manage overdue debts related to China.” and help Sri Lanka overcome the current difficulties.”
People demonstrate in Colombo on July 9, 2022 to protest against 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 accused Beijing of what they call a “debt trap”, saying countries that owe China money could be forced to sign domestically or make major concessions if they can’t pay. China denies these allegations.
Sri Lanka said that in April last year, China accounted for around 10% of its total debtbut Moramudali said in reality that was probably not the case.
“I mean that 10% is also an underestimate,” he said, pointing out that further research provided a more accurate picture of China’s loans to Sri Lanka.
“Sri Lanka [debt] to Chinese creditors amounts to about 20%, not really 10%. So all that 20% will have to be restructured. This means you will have to look at how China Development Bank will handle the restructuring and China Exim Bank will handle the restructuring,” he added.
Sri Lanka was unable to secure a $1.5 billion line of credit from China and has yet to receive a response on the request for a $1 billion loan from China, the government said. former President Rajapaksa 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.
“China is, of course, a very large creditor of Sri Lanka. Sri Lanka is clearly unable to repay that debt. And I hope China will be willing to work with Sri Lanka to restructure the debt – that would probably be both in the interests of China and Sri Lanka,” Yellen said at a press conference.
Political observers point out that Sri Lanka is currently in a difficult situation due to its 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,” said Akhil Bery, director of initiatives for South Asia. at the Asia Society Policy Institute, CNBC’s “Squawk Box Asia.” tuesday.
He said that we knew at that time that the debt was unsustainable.
“The other hubris that has come 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 debt refinancing or debt refinancing, it is unwilling to undertake restructuring because of the precedent it will set.”
According to central bank data obtained by ReutersSri Lanka currently has about $2 billion in foreign exchange reserves against $7 billion in total debt due this year, including $1 billion in notes maturing in July.
Acting President Wickremesinghe said on Monday the country had almost concluded talks with the International Monetary Fund for 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 as soon as there is a new government. It will not be concluded as quickly as the acting president says. I think we all have to recognize that because it might take a few months to finalize the deal,” Moramudali said.
In June, the IMF ended talks with Sri Lanka after failing to reach an agreement for a bailout.
“The IMF has been lenient during the pandemic,” Bery said. “He will seek tough measures, including higher taxes, anti-corruption measures and even possibly central bank independence.”