China refuses conversion of US$ 1.5 B Swap to a loan


A spokesman for the Ministry of Finance (MoF) said it was difficult for Sri Lanka to convert the existing CNY 10 billion (approximately US$ 1.5 billion) swap facility obtained from China into a normal loan.

Sri Lankan authorities have recently requested China to convert the relevant swap facility into a normal loan.

To retain the swap facility active for its intended purpose of importing goods, Sri Lanka must satisfy a covenant in relation to its foreign reserves. The covenant requires Sri Lanka to maintain minimum foreign reserves adequate to cover three months of imports.

The swap agreement signed (March 2021) between the Central Bank of Sri Lanka (CBSL) and the People’s Bank of China (PBoC) is valid for three years.

Since signing the swap agreement, Sri Lanka’s foreign exchange reserves have plummeted to negligible levels. Hence the facility is no longer available for use in satisfying imports.

Steps had already been taken to restructure all foreign loans obtained by Sri Lanka prior to 12 April 2022.

Reports say that the Chinese authorities are reluctant to take any further steps as the swap facility which was provided before 12 April may be subject to the newly auctioned foreign debt restructuring process.

Accordingly, due to the operation of the covenant, Sri Lanka can only draw the proceeds under the swap in Yuan earning interest income by investing the proceeds in Chinese government bonds. In doing so, CBSL pays interest on drawing down the swap facility proceeds in Yuan. 

Sri Lanka’s recently appointed Debt restructuring adviser (financial) Lazard is currently having negotiations with Chinese authorities to get their consent to restructure US$ 5 billion worth Chinese loans with Sri Lanka.

However the Chinese government   has agreed to provide USD 90 million in emergency relief to Sri Lanka, Sri Lanka’s Ambassador to China, Dr Palitha Kohona told Finance Today recently.

It is also stated that rice and medical aid will also be provided under this relief measure.

It is said that rice will be delivered this month while medical aid is already being sent to Sri Lanka.

In another concession, China has recently agreed to refinance its maturing USD 1 billion loan, although tenor and rates are unknown. Sri Lanka, however, has so far declined the refinancing facility, as it has decided to restructure all of its foreign debt, including bilateral arrangements on the principle that all external debtors are treated equally.

Sri Lanka has also applied for USD 100 million in emergency funding through the Chinese-led Beijing-based Asian Infrastructure Investment Bank (AIIB), where Sri Lanka is also a participant.

China remains Sri Lanka’s largest source of imports. In 2020, imports from China amounted to US$ 3.6 billion (22.3% of Sri Lanka’s imports).

By Ishara Gamage