Sri Lanka and Pakistan have been part of China’s Belt and Road Initiative (BRI) for the past decade, using high-interest loans from Beijing to build white elephant projects. Both countries are bankrupt today, and China is not showing the same enthusiasm as the BRI in revitalizing its economy with much-needed aid to overcome its growing food and fuel crisis. The two countries are scraping the bottom of the economic barrel with a very weak US dollar rate, high inflation and very high bank interest rates. The economic crisis in these two countries is a lesson for Nepal, Bangladesh, the Maldives and Myanmar, whose political leaders are often at Beijing’s doorstep for infrastructure financing, and the Chinese Communist Party can penetrate the bureaucracies of the Indian subcontinent. Advantage – benefit – benefit – benefit.
While the Export-Import Bank of India has stated in writing that its financing and debt relief to Sri Lanka will be coordinated with the International Monetary Fund and the Paris Club, the Export-Import Bank of China has made it clear to Colombo that it will only provide repayment. did A moratorium of only two years instead of the 10-year moratorium recommended by the IMF-Pris Club. The International Monetary Fund and the Paris Club have recommended that Sri Lanka’s debt restructuring should take place over 15 years.
That means the IMF’s $2.9 billion package (spread over four years with six-monthly reviews) to Sri Lanka in March is at risk because of China’s EXIM Bank condition. The only other option is for the International Monetary Fund to allow lending against outstanding government debt to save Sri Lanka from total economic and political chaos.
Sri Lanka owes China at least $7 billion, including loans from the China Development Bank, and if private debt is included, this figure rises to another level. The unsustainable high-interest debt stems from the financial irregularities and mismanagement of the Rajapaksa regime, of which the current president, Ranil Wickremesinghe, was also an important part in the past. Thanks to the Rajapaksa’s financial extravagance, high-interest money from China was used to build unsustainable white elephant projects across the country, including the Hambantota port, the Matala Rajapaksa International Airport and the Nurchulai Power Plant. Public discontent that erupted against the Rajapaksas in 2022 allowed fringe far-left political parties to rise in the island nation. Basically, as in Pakistan, the political antidote is worse than economic weakness.
In its letter to IMF Managing Director Kristalina Georgieva on January 16, 2023, India made it clear that it fully supports the IMF and Paris Club Debt Sustainability Analysis without any additional conditions. However, the Modi government made it clear that the Sri Lankan authorities should seek fair debt relief from all trade creditors and other official bilateral creditors, as well as adequate financial assistance from multilateral development banks. A copy of India’s letter to the IMF was also sent to Sri Lanka’s Ministry of Finance.
India’s letter commits to continuing discussions with the Government of Sri Lanka along with the Paris Club on medium to long term debt treatment through maturity extension and interest rate reduction or any other financial operation that would provide similar debt financing/relief.
The Indian understanding of the IMF’s debt sustainability assessment is that it is supported by the program’s targets of reducing Sri Lanka’s public debt-to-GDP ratio below 95 percent by 2032, and the central government’s annual gross financial needs were less than 13 percent. Average GDP in 2032-2027. Apart from this, the central government’s annual foreign currency debt service should be below 4.5% of GDP in 2032-2027 to reduce Sri Lanka’s external financing gap.
