China Upset Over IMF Bailout

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There may be a possibility that China might sue Sri Lanka to recover a US$ 2.8 billion loan that the island owes it, or simply refuse to restructure such debt, the latter being a precondition to obtaining an IMF bailout package.

This newspaper, in its yesterday’s edition, quoting the Chinese Envoy to Colombo Qi Zhenhong, carried a story under the heading “SL Going to IMF Will Affect Future Engagements with China.”

To quote excerpts it said, “The US$ 2.8 billion Chinese loan restructuring facility is on hold as Sri Lanka (SL) has reached out to the IMF for a maximum USD four billion bailout target.”

SL on 12 April 2022 announced that it will default on its foreign debt repayments, other than debt owed to multilateral agencies and locals in the form of the latter’s investments in Sri Lanka development bonds (SLDBs).

The nature of Qi’s comments have to be looked at in the context that previously on two occasions, in 1952 and in 1983, China’s aid was crucial for the  survival of modern SL (Ceylon).

In 1952 when Ceylon, as SL was then known, under the Premiership of Dudley Senanayake was facing a serious food crisis with international rice prices going through the roof, it was Chairman Mao Zedong’s China which came to Ceylon’s aid with the now defunct ‘Rubber-Rice Pact’ (RRP).

Before the RRP, Senanayake pursued other options to prevent the Ceylonese (Sri Lankans) from starving. However, his appeals, even to the USA for ‘rice aid’ fell on deaf ears, forcing Senanayake to turn to China.

Similarly, post 23 July 1983, during President J.R. Jayewardene’s tenure, when LTTE terrorism became fully blown, overtly and covertly aided by Sri Lanka’s giant neighbour India, with virtually the rest of the world refusing to militarily arm SL, only two countries stepped into fill this breach, Deng Xiaoping’s China and General Mohammad Zia-ul-Haq’s Pakistan.

From saving Sri Lanka from starvation in 1952 and terrorism in 1983, however, China’s relationship with Sri Lanka post 2005, under the then President and now Premier Mahinda Rajapaksa’s leadership, took a different turn, transforming itself from  humanitarian to geopolitical, embellished with funding opaque, commercially oriented infrastructure development projects, underlined by ‘land for debt’ swaps.

A few of those opaque, commercially oriented Chinese funded infrastructure development projects were the controversial 900 MW coal fired electricity project at Norochcholai, Hambantota Port  Project, Mattala Airport Project, Sooriyawewa Cricket Stadium, the Galle-Matara Highway Project and the Colombo Port City Project.

What was unique in regard to the above projects were that they were commercially oriented so-called development projects, sans tender calls, despite the fact that repayments, other than in the Port City Project which was an outright development for land swap, had to be made by the Sri Lankan taxpayer.

In tandem with these developments, Sri Lanka’s foreign commercial debt, which is also short term, as a percentage of total foreign debt, which was nought since independence in 1948 to 1989 and which did not rise beyond six per cent up to 2005, with the balance 94 per cent being concessional and long term, however it rose to seven per cent in 2006, 17 per cent in 2007, before marginally declining to 15 per cent in 2008, but shooting up to 28 per cent in 2009, 37 per cent in 2010, 43 per cent in 2011 and 51 per cent in 2012, leading  Sri Lanka to announce, 10 years later on 12 April 2022, that it will default on its foreign debt repayments as elaborated above.

In the backdrop of these developments, Sri Lanka is seeking an IMF loan to bail it out so that it would be able to make essential imports such as medicines, food and fuel to prevent the masses from dying, starving and to keep the wheels of the economy moving. However, a precondition for an IMF bailout package is that Sri Lanka needs to first restructure its debt.

For debt restructuring it needs the cooperation of all creditors, including China. It is now left to be seen whether the IMF will go through with a loan for Sri Lanka in the event China refuses to restructure SL’s debt; that the latter owes to it.