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HomeNewsDeepening Debt Crisis in Sri Lanka Stokes Controversy Over Chinese Lending

Deepening Debt Crisis in Sri Lanka Stokes Controversy Over Chinese Lending


The crisis has also opened a window for India, which provided financial relief to Sri Lanka last week shortly before a $500 million bond matured, to push back against Chinese influence in the Indian Ocean region.

Ajith Nivard Cabraal, Sri Lanka’s central bank governor, said on his official Twitter account that the country had repaid the bond, which matured on Tuesday. It was the first major tranche of $4.5 billion total sovereign debt repayments due in 2022.

But with around two thirds of government revenue already going toward interest payments, President Gotabaya Rajapaksa warned in a speech to parliament that the country would be unable to pay for imports without increasing its foreign currency reserves.

That warning followed his appeal last week to visiting Chinese Foreign Minister Wang Yi for Beijing to restructure its debt, provide concessional trade terms, and lift Covid-related restrictions on Chinese tourists visiting Sri Lanka.

It also came after unusual criticism from within Sri Lanka’s ruling party over China’s lending for a series of major infrastructure projects, which include a $13 billion seafront business hub in the capital, Colombo, and a port and airport in the Rajapaksa family’s home constituency of Hambantota.

Earlier this month, Wijeyadasa Rajapakshe, a member of parliament in the ruling party, wrote a six-page letter addressed to Chinese President Xi Jinping accusing Beijing of pushing Sri Lanka into a debt trap to expand China’s sphere of political influence.

“It is manifestly visible that your friendship with us is no more genuine and candid, instead you use our relations to achieve your ambition of becoming the world power at the stake of lives of our innocent people,” Mr. Rajapakshe wrote in his letter.

Sri Lanka’s President Gotabaya Rajapaksa, in white, and China’s Foreign Minister Wang Yi met this month in Colombo amid allegations of Chinese predatory lending.



Photo:

ishara s. kodikara/Agence France-Presse/Getty Images

China’s Foreign Ministry didn’t respond to a request for comment.

At a regular news briefing last week, Chinese Foreign Ministry spokesman Wang Wenbin said that China had always done its utmost to provide help for Sri Lanka’s economic and social development and would continue to do so in the future.

India’s External Affairs Minister Subrahmanyam Jaishankar said on Saturday that India would continue to support Sri Lanka in all possible ways with its economic and other challenges posed by the coronavirus pandemic. He said the two countries were discussing Indian loans totaling $1.5 billion for essential commodities, fuel, food and medicine.

Recent Indian investments in Sri Lanka include a deal for India’s Adani Group to develop and operate a container terminal in Colombo and an agreement for a subsidiary of the state-run Indian Oil Corporation to operate 14 oil storage tanks in the eastern port city of Trincomalee.

A spokesman for India’s Foreign Ministry said he had no further comment.

Sri Lanka had about $3.5 billion in debt from China as of end-2020, excluding loans to state enterprises, according to Sri Lankan central bank data, about the same as owed to Japan. The largest portion—about 36%—of Sri Lanka’s debt is owed through international sovereign bonds.

While China accounts for only around 10% of Sri Lanka’s total debt, U.S. officials and some scholars have often cited it as evidence of how Beijing is causing debt distress through its Belt and Road initiative to build ports, railways, pipelines and other infrastructure across Asia and beyond.

In one prominent example, Sri Lanka’s government was unable to repay a Chinese loan for the port in Hambantota that China helped build. To settle the loan, it granted a Chinese state company a 99-year lease on the facility.

Beijing denies any ulterior motive and says the projects promote development and benefit all parties.

Sri Lanka’s debt problems have escalated over the last two years, as both its key foreign exchange earners—tourism and remittances from abroad—were hit hard by the coronavirus pandemic.

Confronted with decade-high inflation, a weak currency and rising import costs, Mr. Rajapaksa declared an economic emergency in September, appointing the military to oversee the supply of basic staples such as rice and sugar, sold at government-guaranteed prices. Since November, Moody’s, Fitch and Standard & Poor’s ratings firms have all downgraded Sri Lanka sovereign credit score further into junk territory.

According to Fitch, Sri Lanka’s foreign currency reserves were depleted to as low as $1.6 billion in November, enough to cover less than one month of imports.

Sri Lanka “has no sufficient reserves to import even the essential imports like fuel, medicines, foods, and industrial raw materials.”


— W.A. Wijewardena, a former Sri Lankan central bank deputy governor

In its search for funds to repay loans and boost its foreign currency reserves, Sri Lanka said in December it would seek to repay Iran for oil purchases with $5 million worth of tea a month as a means to conserve foreign currency. An agreement with India last week deferring $500 million in payments owed through the Asian Clearing Union and a $400 million currency swap has also earned some breathing room.

“The forex situation has become so critical that [Sri Lanka] has no sufficient reserves to import even the essential imports like fuel, medicines, foods, and industrial raw materials,” said W.A. Wijewardena, a former Sri Lankan central bank deputy governor.

Some top Sri Lankan economists have called for the government to suspend repayments until it restructures its debt, saying the country’s dwindling reserves are better used to secure the supply of essential goods for its citizens, who are facing rolling power outages and shortages of imported essentials such as milk powder, cooking gas and fuel.

“If it is not done, there will be shortages leading to price increases and long queues,” Mr. Wijewardena said. “They will ultimately result in social and political disorder.”

In his address to parliament, Mr. Rajapaksa said the crisis was the climax of a problem which previous governments had failed to solve, and the country would bank on its existing strategy of boosting tourism, exports and foreign investment.

Mr. Rajapaksa also suggested he wouldn’t deviate from courting Chinese investment, saying that Sri Lanka as a small country with limited natural resources relied on foreign investment for development and job creation.

“If one acts for purely political reasons to misinterpret and create a wrong opinion among the people about foreign investments, then such [a] person is not doing any good to the country,” Mr. Rajapaksa said, without specifying any countries or individuals.

Deep Pal, a visiting fellow at the Carnegie Endowment for International Peace, said while he didn’t believe Sri Lanka was in a debt trap, the problem was compounded by the fact that other key regional players such as India would be hesitant to bail out Sri Lanka if it felt that the funds would go straight to servicing Chinese debt.

“Things are not going to improve for Sri Lanka any time soon,” he said. “In the absence of other players it really allows China to be more significantly involved.”

Write to Philip Wen at philip.wen@wsj.com

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