China’s standoffish position raises concerns over SL’s economic recovery

China’s decision not to actively engage in the debt restructuring plans of Sri Lanka or to invest in potential income-generating projects has raised serious concerns about whether it may complicate the rescue of Sri Lanka’s economy just like it happened in Zambia.

Even during a recent meeting of the Paris Club co-chaired by India, Japan and France in Washington DC held to discuss Sri Lanka’s economic crisis and proposed plans, China only attended as an observer.

According to government data, Sri Lanka owes $3 billion to China, followed by $2.4 billion to the Paris Club of creditor nations and $1.6 billion to India.

Since bilateral creditors have to negotiate among themselves and re-schedule their loans to conform to debt rollover ceilings set by the International Monetary Fund (IMF) to enable Sri Lanka to service them in the future default known as making debt sustainable, it is vital for China to proactively take part in these talks.

Sri Lanka also has to conclude newly launched debt restructuring talks by September, or November at the latest and therefore, it is in the best interest of both Sri Lanka and its major creditors including China to find a middle ground to work together.

The Paris Club of western lenders have a well-oiled mechanism to re-structure debt of defaulted nations, to which other creditors also join in. India has formally joined the Western lenders.

Japan’s Vice Minister for International Affairs Masato Kanda said that they have been asking China to formally participate. “so we would welcome it if Beijing does,” he said.

Due to China’s reserved position, the Sri Lankan Government has been forced to continue debt restructuring talks separately with the Paris Club and India on one side and China on the other side.

President Ranil Wickremesinghe said Sri Lanka will discuss debt restructuring with the Paris Club including India and China separately, as part of the IMF backed plan to reduce and manage debt.

Kicking off a debate on the IMF deal President Wickremesinghe told Parliament that China is expecting to work separately.

"We have now started a creditors' meeting and all for a successful conclusion before the end of 2023," the President said. "Sri Lanka is dedicated to ensure equal treatment for all creditors. We want this exercise to succeed because our experience will enable more middle-income countries to utilise the IMF in ensuring multilateral coordination for debt relief."

Sri Lanka’s Central Bank Governor Nandalal Weerasinghe said Sri Lanka wants China to support its effort to restructure its debt.

“It’s in the best interest for China and Sri Lanka both to complete this process soon and we can get back to repaying our distressed obligation," Weerasinghe said in an interview. “We have to make sure that we do it as soon as possible."

The rescue efforts for Sri Lanka have been a test case of China’s willingness to work with other creditors in providing debt relief.

In February, Paris Club creditors, as well as Hungary and Saudi Arabia, called on China to join the international effort to provide debt relief to Sri Lanka. The appeal for financial backing from the world’s second-biggest economy came amid fears that China’s unilateral positioning might delay and even complicate the rescue of Sri Lanka just like it happened in Zambia.

The rift between Beijing and the Paris Club as well as multilateral institutions has delayed efforts to ease debt burdens on developing economies struggling to recover from the pandemic and repay loans even as a stronger US dollar and higher interest rates increase debt servicing costs.

During the past decade, China funded the construction of massive infrastructure projects in Sri Lanka meant to boost the country’s economy. However, even before Sri Lanka’s economy collapsed, there were constant questions and concerns whether these projects had yielded any outcome.

Some of these projects include the once abandoned Magampura Rajapaksa International Airport in Mattala, the Hambantota Port which was leased out to Chinese firms and the Lotus Tower in Colombo. All these Chinese-funded projects are seen as “white elephants” that ultimately contributed to the worst economic crisis Sri Lanka has ever faced.

Even amidst the crisis Sri Lanka is going through, China seems unfazed and appears to continue its agenda and affairs regardless. This was evident from the frequent number of visits undertaken by Chinese senior officials to Sri Lanka. Despite many delegates visiting the country, Sri Lanka has not yet received any substantial assurance from China to help resuscitate the economy.

Yunnan Province Governor Wang Yubo visited Sri Lanka from May 16 to May 20 followed by Chinese Vice Minister of Foreign Affairs Sun Weidong who led a Foreign Ministry delegation to Sri Lanka from May 29 to June 01.

Though several meetings were held and agreements were signed, no discussion had been held on debt restructuring of Sri Lanka.