Sri Lanka seeks to restructure Chinese debt amid crisis


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COLOMBO, Sri Lanka – The debt-ridden President of Sri Lanka on Sunday called on China to restructure its loans and access preferential credits for imports of essential goods as the island nation grapples with its worst economic crisis, in part due to projects funded by Beijing that do not generate income.

President Gotabaya Rajapaksa told Chinese Foreign Minister Wang Yi that it would be “a great relief for the country if attention could be paid to restructuring debt repayments as a solution to the economic crisis that has arisen in the face of the COVID-19 pandemic. “, according to a statement from his office.

Rajapaksa asked Wang for a concessional credit facility for imports so that industries can operate without interruption, the statement said. He also asked for help to allow Chinese tourists to travel to Sri Lanka in a secure bubble.

Wang and Prime Minister Mahinda Rajapaksa, brother of the president, then visited the port city of Colombo, a reclaimed island developed with Chinese investment, where they opened a promenade and inaugurated the navigation of 65 boats to commemorate 65 years of relations. diplomatic relations between the two countries.

In his address to the port city, Wang said a persistent and uncontrolled pandemic has made economic recovery difficult, and the two countries must use the anniversary of diplomatic ties to work more closely.

It has not developed or announced any relief measures.

Wang arrived in Sri Lanka from the Maldives on Saturday on the final leg of a multinational trip that also took him to Eritrea, Kenya and the Comoros in East Africa.

Sri Lanka is facing one of its worst economic crises, with foreign exchange reserves reduced to around $ 1.6 billion, barely enough for a few weeks of imports. It also has external debt obligations exceeding $ 7 billion in 2022, including the repayment of bonds worth $ 500 million in January and $ 1 billion in July.

The decline in foreign exchange reserves is partly attributed to infrastructure projects built with Chinese loans that are not making money. China loaned money to build a seaport and an airport in the southern district of Hambantota, in addition to an extensive network of roads.

Figures from the Central Bank show that current Chinese loans to Sri Lanka total around $ 3.38 billion, not including loans to state-owned enterprises, which are counted separately and considered substantial.

“Technically, we can pretend we’re bankrupt now,” said Muttukrishna Sarvananthan, senior researcher at the Point Pedro Development Institute. “When your net foreign assets are in the red, it means you are technically bankrupt.”

The situation has left households with severe shortages. People line up to buy essentials like powdered milk, cooking gas and kerosene. Prices have risen sharply and the Central Bank indicates that the inflation rate rose to 12.1% at the end of December against 9.9% in November. Food inflation has risen to over 22% over the same period.

Due to a shortage of foreign exchange, importers are unable to clear their cargo containing essential products through customs, and manufacturers cannot purchase raw materials from abroad.

Remittances from expatriates also fell after the government ordered mandatory foreign currency conversion and exchange rate controls.

The downgrades of rating agencies have cost Sri Lanka much of its borrowing power. In December, Fitch Ratings noted an increased likelihood of credit default.

The Central Bank has added a $ 1.5 billion Chinese currency exchange to reserves, but economists disagree on whether this can be part of foreign exchange reserves or not.

Wang’s visit once again shed light on the regional power struggle between China and India, Sri Lanka’s closest neighbor who sees the island as part of its domain.

Before Wang speaks with Sri Lankan leaders, the country’s top Indian diplomat on Sunday morning inaugurated train service from a train station near Colombo to the north using compartments provided through an Indian loan facility. .

A statement from the Indian embassy quoted Vinod Jacob recalling “the priority given by Indian Prime Minister Narendra Modi to relations with Sri Lanka in accordance with the ‘neighborhood first’ policy”.

He said a recent statement by Indian Foreign Minister S Jaishankar that India will support Sri Lanka in difficult times was an affirmation of that policy in the current context.

“We can see Sri Lanka standing between India and China for a possible bailout,” political analyst Ranga Kalansooriya said.

“India has been dragging its feet for some time as China tries to manipulate the situation as much as possible,” he added.

China sees Sri Lanka as an essential link in its Belt and Road global infrastructure initiative. Relations have recently been strained over a shipment of Chinese fertilizers believed to contain harmful bacteria and trade deals that have been signed with rivals China, the United States and India.

Kalansooriya said China was unlikely to lift Sri Lanka out of its economic crisis.

“They will be looking for more business opportunities, fishing in the troubled waters of the country’s economic slump,” he said.

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