India, Alternative to IMF

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Yesterday, this newspaper, quoting India’s External Affairs Minister Dr. S. Jaishankar, said that “India would give all the help it could to Sri Lanka at the IMF.” India is one of the foremost countries that have pushed for the IMF bailout package for Sri Lanka amidst the financial meltdown and political crisis, it further said.

According to reports, Sri Lanka is seeking an IMF bailout package to the tune of US$ three billion. An IMF team is due in the island on a week’s visit on Wednesday. However, a condition for an IMF bailout package is that Sri Lanka’s international creditors should be unanimous in rolling out a debt restructuring package for Sri Lanka. Sri Lanka declared itself bankrupt in April.

While all other creditors led by the ‘G7’ countries are amenable to a debt restructuring package for the island, not so China, which idea of debt restructuring is to give a new loan of unknown interest cost to settle the existing loans owed to China.

  However, the IMF is not amenable to such an arrangement. Therefore, the need is to get China to fall in line to  ‘conventional’ debt restructuring which includes the slashing down of the original interest rates  charged on the loans taken, extending their tenures and in ‘extreme’ situations, creditors taking a cut on the original ‘debt capital’.  

One creditor, Hamilton Reserve Bank, a bank based in St. Kitts & Nevis, has taken Sri Lanka to Court to recover their loan (US$ 250 million) and interest due. When the Hamilton issue was brought up before the IMF, at a virtual press conference held on 30 June in Colombo, IMF’s Senior Mission Chief to Sri Lanka, Peter Breuer, implied that the Hamilton case was manageable, while at the same time saying that if another party also sues, then, it will be problematic.

In the case of China, Sri Lanka owes not US$ 250 million, but billions of US dollars to this, the world’s second largest economy. Therefore, the question arises as to how may India intervene on behalf of Sri Lanka with the IMF if China is adamant in sticking to ‘debt restructuring’ as per its definition of ‘debt restructuring’, as opposed to that of the IMF’s?

In the past, i.e. in 2009, when Sri Lanka applied for an IMF loan, when facing a similar balance of payments crisis, or, rather, much milder than the current, the then Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal, speaking at the opening of the Axis Bank branch office in Colombo in 2011, said that when the IMF was dilly dallying in approving this loan, India had stepped in and had said that if the IMF doesn’t, India will fill the breach.

Subsequently, in July 2009, the IMF approved a $ 2.5 billion Stand by Arrangement (SBA) to Sri Lanka, to date, the largest ever loan approved by the IMF to the island. Meanwhile, Axis Bank closed its operations in Sri Lanka, together with ICICI Bank, India in 2020, due to Sri Lanka imposing import restrictions, that stultified those banks’ trading activities, in order to protect the country’s sparse dollar reserves.

Therefore, the question is, if the IMF doesn’t provide that
$ three billion due to China’s recalcitrance; would India step in to fill the breach?  India media reported on Saturday that Sri Lanka’s giant neighbour’s reserves as at 12 August stood at $ 571 billion. $ three billion of this amount to Sri Lanka will be equivalent to five per cent of its value, peanuts to India. 

Meanwhile, Sri Lanka’s foreign reserves as at last month end, according to CBSL, stood at $ 1.8 billion, of which value, $ 1.5 billion includes a Chinese swap facility, which use, however, is restricted only to Chinese imports as per Chinese swap conditions.

Both China and India are competing to woo Sri Lanka for geopolitical reasons. Therefore, India being an alternative to the IMF will draw Sri Lanka closer to the Indian camp, to China’s chagrin.  Under the circumstances, it’s likely that China will fall in line with the IMF, or, otherwise, run the risk of being branded a predator,  not good for its global international image.