Is Sri Lanka really in a China debt trap?

By Anjali Caldera | Published: 2:00 AM Oct 27 2020
FT Is Sri Lanka really in a China debt trap?

By Anjali Caldera

The Sri Lanka Government turning once again to China, for financial assistance, rather than making a request to the International Monetary Fund (IMF), created a major outburst recently. 

China is to provide US$ 700 million to Sri Lanka.

Sri Lanka in a debt trap

Most critics consider Sri Lanka turning to China for the bailout as a ‘debt trap for Sri Lanka’. Thus, analysing the Sri Lanka Government’s request from China is necessary to clear out the hustle bustle over the debt trap.

An Economist and also Odiliya Residencies CEO, Dr. Piyavi Wijewardene joins Ceylon FT to express his views on this.

Lending is necessary to avoid defaulting on foreign debts. Thus to manage the working capital, the Government requires funds, said Dr. Wijewardena.

A unique feature of a syndicated loan, or Foreign Currency Term Financing Facility (FTFF), is that the loan is not attached to a project, thus the Sri Lankan Government has the liberty to use the loan money at their will. This is contrary to project loans, in which loan money should be strictly used only for project purposes. Hence, a project loan does not provide a way out from a balance of payment crisis in the short term. Often, when Sri Lanka has faced Balance of Payment (BoP) issues, they seek the support of the IMF, which provided short-term loans to strengthen foreign reserves, thereby assisting Sri Lanka to manage immediate BoP issues.

In that context, Sri Lanka was compelled to focus beyond project loans and look at loan instruments that would assist them in managing BOP crises and short-term public finance issues encountered by the Government.

This is the third request for this year (2020) made by the Sri Lanka Government from China.

“The Government owed US $50 billion to foreign creditors. China eased some of the tension earlier this year by injecting US $500 million as part of a US $1.2 billion syndicated loan from the China Development Bank. Then again The Government received US$ 80 million for road developments,” added Dr. Wijewardena.

“Besides Sri Lanka annually accumulates US$ 10 billion in trade deficit plus US$ 50 billion for lending.”

Prior to 2015, almost all Chinese loans were project loans, the majority of which were obtained from Chinese EXIM Bank for heavy infrastructure construction projects. These include the Hambantota Port, Colombo-Katunayake Expressway, and Mattala Airport. The money obtained through these project loans was not permitted to be used for other purposes.

Thus, bailing out is necessary to avoid the credit default of the Government. But turning towards China to obtain the credit facilities became questionable.  

Why China?

According to Dr. Wijewardena, Sri Lanka’s preference for China is tied to the country’s complex history with the multi-lateral lender in Washington DC. Colombo has needed IMF bailouts 16 times over the past 55 years (since 1965). That places it second only to Pakistan, which has gone to the IMF 20 times – making it the most IMF-dependent of the world’s debt-strapped nations.

“Only nine of the 16 IMF programmes in Sri Lanka were completed. After the Moody’s downgrade, and without an IMF programme, Sri Lanka will not be able to access the markets.”

Yet, in recent years, Chinese lenders have swooped in to replace the IMF. 

“The Rajapaksa regime maintained a strategically good relationship with China; the settlement plan seems to be comfortable with China than IMF due to its historical relationship. Besides, China being the Asian giant with a powerful economy must be a relieving factor for the Sri Lanka Government than struggling with western leaders,” added Dr. Wijewardena. 

Moreover, as far as it is concerned, China can be considered not as an ethnocentric invader; thus neither political nor religious/cultural interference affects the country.  “We don’t see Chinese culture instilled in Sri Lanka unless one or two Confucius centres, though the country had cultural bonds since AD 410 with the arrival of Fa-Hien.”

This non geo-political invasion must have been a quite relieving factor for Sri Lanka. If we have to go and hold the IMF’s hand or if the IMF has to hold our hand, I think, it is a danger signal.

By Anjali Caldera | Published: 2:00 AM Oct 27 2020

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