Chinese assistance ‘within’ its capacity to Sri Lanka

Until Chinese President Xi Jinping sent a congratulatory message on July 22, 2022 to the new President of Sri Lanka Ranil Wickremesinghe on his election, it seemed there was little or no positive response to Sri Lanka’s economic crisis from China.

Though congratulatory messages are purely customary, in his message, President Xi pointed out that he was willing to provide support and assistance within their capacity to President Wickremesinghe and the Sri Lankan people in their efforts.

The message went on to note that Xi believed that under the leadership of President Wickremesinghe, Sri Lanka will surely overcome temporary difficulties and advance the process of economic and social recovery.

As Sri Lanka is going through the worst economic crisis it has ever faced since its Independence due to lack of foreign reserves, the South Asian nation has been making requests to donor nations and organisations for relief especially in terms of purchasing essentials on Credit and settling loans obtained.

China, unlike most of the countries, has not been very forthcoming to the requests made by Sri Lanka on debt restructuring.  According to the figures of Sri Lanka’s Central Bank, the amount of existing Chinese loans to Sri Lanka is around USD 3.38 billion. China was unwilling to restructure Sri Lanka’s debt saying it does not want to set a bad precedent.

Meanwhile, the Sri Lankan Government in June said that it was having discussions to obtain a fresh loan from China to repay some of its debt to Chinese banks after China told Sri Lanka it was not in favor of restructuring existing loans.

A few days before President Xi sent a congratulatory message to his Sri Lankan counterpart,  Sri Lanka's Ambassador to China Palitha Kohona on July 15 said that Sri Lanka is continuing negotiations with China for as much as USD 4 billion in aid and is confident Beijing will agree "at some point," to the requests.

Sri Lankan authorities are asking China for a loan of USD 1 billion to settle loans owed to China itself coming due this year and a USD 1.5 billion credit line to pay for Chinese imports along with an activation of a USD 1.5 billion swap.

"We are confident that at some point the Chinese system will agree to our requests because these are not unreasonable requests. We have made similar requests to other creditors. Sri Lanka needs the funding to bring stability to our financial system and we are confident that the Chinese will come to the party sooner than later," Kohona said.

Meanwhile, experts say Sri Lanka won’t be able to resolve its debt restructuring issues without the Chinese assistance.

Umesh Moramudali, a lecturer at the University of Colombo said that China’s willingness to provide substantial debt relief to Sri Lanka will be vital to accelerate the debt restructuring and in helping the country get out of its current situation.

China has invested billions in Sri Lanka under its Belt and Road Initiative and this includes the Colombo International Financial Centre being built on a reclaimed land and the Hambantota Port.

According to data released by the Central Bank of Sri Lanka, the country currently has about USD 2 billion in foreign exchange reserves against USD 7 billion in total debt due this year, including USD 1 billion worth of notes maturing in July.

US Treasury Secretary Janet Yellen who was visiting Indonesia said on July 14  that it is in China’s interest to restructure Sri Lanka’s debt. “China is a very important creditor of Sri Lanka. Sri Lanka is clearly unable to repay that debt. And it’s my hope that China will be willing to work with Sri Lanka to restructure the debt — it would likely be both in China and Sri Lanka’s interest,” she said.

Meanwhile, President Wickremesinghe said negotiations with the International Monetary Fund (IMF) for a possible debt relief are nearing conclusion, and discussions with donor countries are also progressing .

However, Chinese Ambassador in Colombo Qi Zhenhong said in late April that negotiating with the IMF would interfere with China’s loan offer. The IMF usually requires a borrower to work out a deal with all creditors to reduce debts. China has avoided joining the London Club of government lenders, the forum for negotiating debt cuts.

Central Bank Governor of Sri Lanka Nandalal Weerasinghe has said that China and other creditors must accept the same terms. "It is not fair to treat one creditor differently to others. Then the others won't come onboard," he was quoted as saying.

Subsequently, Chinese Foreign Ministry Spokesperson Wang Wenbin has declined to say if China was preparing assistance when asked whether China was considering responding to Sri Lankan requests for financial aid. His answer was, “China is ready to work with relevant countries and relevant institutions to help Sri Lanka achieve sustainable development and overcome the current difficulties.”