Debt Restructuring and China

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China’s recalcitrance to restructure Sri Lanka’s debts so that it can have recourse to an IMF loan, said to be to the tune of US$ 3 billion, to tide over its foreign exchange (FX) crisis is because it is eyeing more investments in the country, experts say.

Sri Lanka’s FX crisis is exemplified by the long queues seen at fuel stations today because the Government has either no/or lacks US dollars to import fuel, thereby fanning political and socioeconomic unrest in the country.

IMF loans come with a maximum of 4.1 per cent interest, unlike China’s. For instance for the Hambantota Port it was 6.3 per cent. Further, if a country defaults on an IMF loan there is ‘no punishment’, but if a country defaults, say on a Chinese loan/loans, though that country cannot be taken to Court, there are other repercussions.

An IMF precondition for aid is that Sri Lanka needs to restructure its debt after first coming to an agreement with all of its creditors. All other creditors, including the G7 countries, USA, UK, Germany, Japan,Canada, Italy and France are all amenable to such a debt restructuring other than China.

For instance, recently, Sri Lanka gave up one of its white elephant projects, the Hambantota Port to the Chinese, built from a mix of commercial and ‘concessional’ loans obtained from it because it was unable to service that loan.

There are more such white elephant projects, built after obtaining loans from China and which may or may not have been settled as yet. They include the Galle-Matara Highway, Mattala Airport, ‘Nelum Kulana’, Colombo, Norochcholai Coal Plant and the list goes on. China may be eyeing all of those land/real estate as an exchange for loan repayments, like in the case of Hambantota.

Sri Lanka’s China dilemma is two-fold. They are whether to default and risk facing the repercussions that go with such an action, while at the same time Sri Lankans continue to suffer due to the lack of dollars and no IMF deal?

Or, make ‘land for loans swaps’ like in the case of Hambantota, but then face the risk of being ostracised by the free world in the context that the West is Sri Lanka’s biggest export market, be it merchandise or services exports, whilst also facing the wrath of its giant neighbour India, which, like the West as well as Japan, don’t trust China because of its expansionist policies.

Sri Lanka recently declared itself bankrupt. According to ‘Management Study Guide’, a Delhi based website for management students, while it is not possible for a creditor to sue a debtor country to recover dues, however, under such circumstances, the debtor country runs the risk of losing its reputation (reputational risk), inability to source future credit and even if possible, such credit  being available at a premium.

This is where the free world needs to come to Sri Lanka’s aid to prevent the island’s people from starving, in the event the country doesn’t agree for a ‘land for loan”’ swap with China. But to get succour from the rest of the world, Sri Lanka also needs to get its act together.

It needs to do two things, possibly simultaneously, to win the confidence of the free world. They are: 1) Pass legislation re-empowering executive powers to the Legislature once more and not to the President. It’s because Sri Lanka has an Executive Presidential model that such corrupt white elephant projects in the first place saw the light of day. The proposed 22nd Amendment is said to rectify this shortcoming. However, passing legislation alone is not enough. And 2) Sri Lanka also needs to pass laws to recover stolen assets, a natural reaction to the action of approving the above white elephant projects sans tender calls and to prosecute such offenders regardless of their status. The ball is now in the UNP Leader President Ranil Wickremesinghe’s court.