Sri Lanka will not be able to solve its debt restructuring problems without help from China as the country teeters on the brink of economic collapse, according to analysts.
Sri Lanka has defaulted on its debtplunging the island nation into its worst financial crisis since independence in 1948. In addition to fuel shortages, the country also faces the possibility of running out of food, basic goods and medicine.
Public frustration over the deepening economic crisis has spilled over into angry street protests in recent months. President Gotabaya Rajapaksa, who is blamed for economic mismanagement, was forced to resign and fled abroad last week as anger towards his government skyrocketed.
Interim President Ranil Wickremesinghe declared a state of emergency on Sunday, in an effort to quell the protests ahead of a vote in parliament on Wednesday to choose a new leader.
China’s willingness to provide substantial debt relief to Sri Lanka will be vital in accelerating debt restructuring and helping the country out of its current situation, said Umesh Moramudali, a professor at the University of Colombo.
“You can’t get out of this crisis without China,” Moramudali told CNBC’s “Streets Signs Asia” on Tuesday. “China needs to agree to restructure its debt, which is not its usual path.”
China has invested billions in Sri Lanka under its Belt and Road initiative. The massive infrastructure program was launched in 2013 and aims to build ports, roads, railways and pipelines in Asia, Europe and Africa.
“Sri Lanka needs to come to a common framework and what the international community is insisting on is that China also agrees to a common framework for debt restructuring,” Moramudali added. “It’s still not entirely clear what level of negotiation we are at, particularly with China.”
At a regular news conference last weekChinese Foreign Ministry spokesman Wang Wenbin said that “shortly after the Sri Lankan government announced the suspension of international debt payments, Chinese financial institutions approached the Sri Lankan side and expressed their willingness to find an appropriate way to handle overdue debts related to China.” and help Sri Lanka to overcome the current difficulties”.
People march in Colombo on July 9, 2022 to protest the ongoing economic crisis in Sri Lanka.
Akila Jayawardana | NurPhoto via Getty Images
In a high-profile case, Beijing took over a strategic port in 2017 when Sri Lanka defaulted on its debt service.
Critics have accused Beijing of what they call a “debt trap,” saying countries that owe China money may be forced to give up national territory or make big concessions if they can’t pay. China denies those accusations.
Sri Lanka said that as of April last year, China accounted for about 10% of its total debtbut Moramudali said that is probably not the case in reality.
“I want to say that this 10% is also an underestimate,” he said, stressing that more research provided a more accurate picture of Chinese lending to Sri Lanka.
Sri Lanka [debt] Chinese creditors get around 20%, not really 10%. So all that 20% will have to be restructured. That means you will have to see how China development bank will deal with restructuring and China Exim bank will deal with restructuring,” he added.
Sri Lanka was unable to take advantage of a $1.5 billion credit line from China and has yet to receive a response on requesting China for a $1 billion loan, former President Rajapaksa said in June. according to a Bloomberg report.
At last week’s Group of 20 meeting, US Treasury Secretary Janet Yellen said it is in China’s interest to restructure Sri Lanka’s debt.
“China is of course a very important creditor of Sri Lanka. Sri Lanka clearly cannot pay that debt. And I hope that China is willing to work with Sri Lanka to restructure the debt; the interest of China and Sri Lanka,” Yellen said at a news conference.
Political observers stress that Sri Lanka is currently in a difficult situation due to its debt to China.
“One of Sri Lanka’s tragic mistakes was in 2020 when the pandemic hit, it did not engage in restructuring negotiations with its creditors,” Akhil Bery, director of South Asian Initiatives at the Asia Society Policy Institute, told “Squawk Box”. Asia” from CNBC. on Tuesday.
He said at the time the debt was known to be unsustainable.
“The other arrogance that has come out on behalf of Sri Lankan politicians is to believe that China would come to their aid and restructure their loans,” Bery added.
“While China may be willing to engage in a debt refinancing or debt refinancing, it is not willing to undertake a restructuring because of the precedent it will set.”
according to central bank data obtained by ReutersSri Lanka currently has around $2bn in foreign exchange reserves against $7bn in total debt due this year, including $1bn in notes due in July.
Interim President Wickremesinghe said Monday that the country had almost concluded talks with the International Monetary Fund for possible debt relief.
Negotiations with the IMF “are coming to an end and talks with donor countries are also progressing,” Wickremesinghe’s office said. in a twitter post.
“The [IMF] negotiations will resume once there is a new government. It will not be concluded as quickly as the interim president says. I think we all need to recognize that because it will take maybe a couple of months to finalize the deal,” Moramudali said.
In June, the IMF ended talks with Sri Lanka after not being able to finish an agreement for a rescue package.
“The IMF was lenient during the pandemic,” Bery said. “He is going to seek some tough measures, including tax increases, including anti-corruption measures and even possibly central bank independence.”