By P.K.Balachandran
It is now generally acknowledged that while India has rushed to Sri Lanka’s help with funds and material aid as its people grapple with scarcities and skyrocketing prices, China had been an idle spectator of the island nation’s plight.
China has cold-shouldered Sri Lanka’s appeal for debt repayment restructuring when the country is faced with an acute forex shortage and has had to rush to the IMF for urgent relief. The Chinese appear to be making use of the crisis to get some of their long standing demands met. They know that Indian help will run out in a few months, the IMF’s conditions will be painful and that the Sri Lankans will have to come back to China for funds in the not-too-distant future.
Sure, the Chinese have genuine grievances against Sri Lankan regimes which need to be addressed to put the relationship on an even keel. And China has its lending policies to adhere to also. But the lack of response from Beijing to pleas from Sri Lanka is depleting China’s political and social capital among Sri Lankans. It has eroded whatever soft power China had in the island nation.
Recently, the Sri Lankan Media Minister Nalaka Godahewa had said that the government is discussing with China how to manage the repayment of the debt it owes to that country in the context of China’s unwillingness to re-structure the repayment schedule.
No repayment is due to China in the short term. However, Sri Lanka is in dire need of foreign exchange, and every concession, including debt restructuring, would help. Recently, in a desperate step, the government had temporarily suspended debt repayment across the board.
But debt restructuring is not favored generally, even by the IMF, says economist Umesh Moramudali. In his view, the IMF might eventually offer a Term Loan which will help Sri Lanka use the money to repay other loans or use it in any other way to lessen the burden on it.
Instead of restructuring, China has offered a US$ 1 billion loan to repay loans already taken from it, plus US$ 1.5 billion as credit for buying goods from China. When President Gotabaya Rajapaksa told the visiting Chinese Foreign Minister, Wang Yi, in January this year, that it would be a “great relief” if China re-structured the repayment schedule, Wang did not commit himself, but stated that Sri Lanka should provide necessary conditions for Chinese investments, make the Colombo Port City and the Hambantota port “engines of Sri Lanka’s industrial growth” and resume talks for an early conclusion of a Free Trade Agreement.
Recently, the Chinese Ambassador, Qi Zhenhong, said that China would await the results of Lanka’s negotiations with the IMF, and went on to warn that Sino-Lankan bilateral relations would be shaped by the outcome of the negotiations. He may have said this in the context of the IMF’s possible disapproval of Chinese loans which, in the West’s view, push developing countries into debt traps. Qi then repeated Wang’s call for an early movement towards a Sino-Lankan FTA.
Pointing to another issue, Minister Godahewa told the media that the West’s reaction to any deal between Sri Lanka and China would also have to be considered by the Lankan government. Sri Lanka is thus caught between the devil and the deep blue sea. While it desperately needs IMF’s help, China cannot be sidelined either. China and Japan are the second largest bilateral lenders.
Views from China
After Wang’s visit in January, the Chinese Communist Party-run Global Times quoted Song Wei of the Chinese Academy of International Trade and Economic Cooperation, as saying that only “interest-free loans” are eligible for debt relief and that loans raised through the market are not.
However, he added that China may “negotiate equity cooperation and rescheduling,” thus indicating a window of opportunity for rescheduling.
According to Sri Lankan diplomats, talks with China on rescheduling and related matters will start after the current holidays in that country. In addition, the Lankan Prime Minister Mahinda Rajapaksa told his Chinese counterpart Li Keqiang that Sri Lanka will begin working on restarting talks on the FTA suspended in 2018, one of the main demands of the Chinese.
Be that as it may, China’s lends to Sri Lanka for interest, although the rates are generally low (at 2% according to Moramudali). There are no interest-free loans. And grants have been few and far between. Therefore, China will have difficulty finding ways to restructure loans to Sri Lanka.
In the case of interest-free loans to various countries, China has been significantly generous, excusing repayment and structuring repayments. Global Times pointed out in January this year, that China had announced cancellation of 15 African countries’ debt in the form of interest-free government loans that were due to mature by the end of 2020.
According to Deborah Brautigam and Yinxuan Wang (Global Debt Relief Dashboard: Tracking Chinese Debt Relief in the COVID-19 Era, China Africa Research Initiative (CARI), Johns Hopkins University School of Advanced International Studies, Version 1.6, January 2021), Chinese debt relief falls into four categories: the G20 Debt Service Suspension Initiative (DSSI); debt cancellation under the Forum on China Africa Cooperation (FOCAC); ad hoc debt relief; and contributions to the IMF’s Catastrophe Containment and Relief Trust.
Debt relief can involve renewal/refinancing by which the outstanding balance of a loan is transferred to a new loan agreement; re-profiling /rescheduling (extending the repayment time, but not reducing the net present value of the debt – all DSSI treatments fall into this category); restructuring (changes in the terms that result in a reduction in the net present value) or debt forgiveness (reductions in the principal, which can be partial or complete).
Four Chinese lending institutions have participated in debt restructuring so far: The Export-Import Bank of China (Eximbank) China Development Bank; (CDB); Industrial and Commercial Bank of China (ICBC); and China International Development Cooperation Agency (CIDCA).
According to the Jubilee Debt Campaign UK, China has suspended US$ 5.7 billion in debt, accounting for more than half of the world’s total.
But Sri Lanka is not entitled the G20 Debt Service Suspension Initiative (DSSI).
However, Ecuador, which was not eligible for DSSI, received a grace period on a loan with the China Development Bank in August 2020, which allowed the postponement of US$ 417 million in payments for one year. Ecuador also reached an agreement with the China Eximbank to defer US$ 474 million in payments between September 2020 and the end of 2021.
Venezuela was also not eligible for DSSI, but according to Reuters, in August 2020, Venezuela reportedly won a grace period until the end of 2020 from Chinese banks on some of its US$ 19 billion in oil-secured loans. This deferred US$ 3 billion in 2020 loan repayments, mainly to the China Development Bank.
Chinese banks renewed maturing commercial loans to Pakistan. China also renewed its three-year bilateral currency swap with Pakistan to support Pakistan’s debt sustainability. But Beijing refused to restructure terms for several Belt and Road Initiative (CPEC) power plant projects with Chinese investment. According to Deborah Brautigam and Yinxuan Wang, the China Development Bank reportedly increased a credit line by US$ 700 million and “lowered the interest rate and delayed the repayment timeline by two years.”
Therefore, China is likely to consider various ways and means of helping Sri Lanka face the unprecedented crisis it is undergoing. But it will not be smooth sailing for Sri Lanka because it has to negotiate hard and deliver on conditions which lenders lay down.
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