China turns down Sri Lanka’s request for debt restructuring

News channel CNBC on August 31, 2021, carried a photograph of a long queue of
customers outside a supermarket in Colombo; waiting to buy their daily needs. It was
the day Sri Lanka declared a state of emergency over food shortage as private banks
ran out of foreign exchange to finance imports. There was a sharp rise in the price of
sugar, rice, onions and potatoes, consumers faced shortages in the supply of milk
powder, kerosene oil and cooking gas. The government imposed a ban on the import
of edible oil and turmeric in a bid to save foreign exchange. Motorists were standing
in long queues to buy fuel.
“Milk has been rationed together with other food items, like rice and sugar,” a mother
of two children standing in the queue told the CNBC reporter. “I have children who
need milk.”
The crisis came in the wake of the pandemic that dried up the international tourist
traffic to the island nation, one of its main foreign exchange earners. By the time,
however, Sri Lanka’s debts had spiralled and foreign exchange reserves had shrunk,
the end result of reckless borrowings from China to finance infrastructure projects.
There was no provision to cater to a crisis situation. The moment tourism, the money
spinner for the economy of Sri Lanka, was hit by the pandemic, the economic structure
of the country already tottering under the heavy burden of loans crumbled.
The bulk of this debt was owed to China, nearly $8 billion. Colombo’s debt repayment
to Beijing amounted to nearly $2 billion in 2021-22. This debt burden and the resultant
disruptions in the lives of the common Lankan people were the consequence of Belt
and Road Initiative projects like Hambantota Port and Colombo Port City for which
Chinese agencies have lent large amounts to Sri Lanka under stiff terms of repayment.
Hambantota port has already been leased out to China for 99 years against $1.2
billion.
Reuters reported on March 2, 2022, that the International Monetary Fund had warned
that Sri Lanka needed to tighten its monetary policy to contain rising inflation and put
its high debt repayment on track. Since 2020, the foreign exchange reserves of the
island nation have plunged by 70 percent. While Colombo had a foreign exchange
reserve of $2.36 billion at the end of January 2020, it had to meet a total debt
repayment requirement of $4 billion in 2021-22.
In this critical situation, in December 2021 Sri Lanka approached its principal creditor
country China, with a request for restructuring of debt. According to recent reports,
however, Beijing has shown Colombo the door. There has only been a vague
assurance that China would assist Colombo to the best of its ability to overcome the
foreign exchange crisis. In December 2021, President of Sri Lanka Gotabaya
Rajapaksa in a meeting with Foreign Minister of China Wang Yi sought the assistance
of Beijing in the face of the deepening foreign exchange crisis of Sri Lanka and
spiralling external debt. He said it would be a great relief to Colombo if a restructuring
of the debt could be arranged to mitigate the economic crisis that had arisen in the
face of the Covid-19 outbreak.
Replying to a question on the pending request from Sri Lanka for a debt relief, Foreign
Ministry spokesman of China Zhao Lijian said in a news conference on March 9, 2022,that China had been providing assistance for the socio-economic development of Sri
Lanka to the best of its ability and would continue to do so. In concrete terms, this
meant nothing.
Ironically, the deeply pro-China Gotabaya Rajapaksa government of Sri Lanka has
booted out the Millennium Challenge Corporation (MCC) of the USA with its offer to
extend developmental assistance grant to Colombo. In December 2020, the Board of
Directors of MCC discontinued its $480 million Compact with the Sri Lankan
Government “due to lack of partner country engagement,” as the U. S. embassy in
Colombo put it. The proposed grant which the MCC Board approved in April 2019 was
designed to reduce poverty through economic growth. It would have reduced traffic
congestion and air pollution in Colombo and improved the public transport; also
upgraded the provincial roads to help farmers get their goods to the market and
provided secure land titles to small farmers of Sri Lanka and other landholders through
land registration.
In the Presidential election in Sri Lanka in November 2019 and the general election
in 2020, the MCC grant became a hotly debated political issue. The attitude of
Colombo to the project changed after Mahendra Rajapaksa took over as the Prime
Minister and his younger brother Gotabaya Rajapaksa the President. The Rajapaksas
are known to be pro-China. Indeed, the relations between China and Sri Lanka are
now transgressing the limits of developmental assistance. In a recent visit of Chinese
State Councillor and Minister of National Defence Wei Fenghe to Sri Lanka, the two
sides vowed to enhance co-operation in all sectors, “including the military.” A “Military
Assistance Protocol” was signed between the two sides.
The projects that are coming up in Sri Lanka with assistance from China are likely
further to deepen the indebtedness of the island nation. Local people of Sri Lanka are
protesting against some of these as they are going to affect their life and livelihood.
Among them is an industrial park attached to the Hambantota International Port which
is coming up on an area of 15,000 acres. Reports say that there have been violent
protests by local people against the proposed industrial park as they fear that the area
would become a Chinese colony. Buddhist monks are also involved in these protests.
Thousands of Chinese are working in projects in Sri Lanka that are coming up in the
interest of Chinese companies. Few Sri Lankans are engaged, except as drivers and
security guards. Han people from China are being brought in to work. to the detriment
of the natives of Sri Lanka.
The fear of the common people that the Hambantota area would become a Chinese
colony is not an unfounded one. According to a Xinhua report on August 18, 2021, the
Hambantota International Port Group has already signed agreements with Chinese
companies for the manufacture of items like tyres and household electrical appliances.
Due to the influx of Chinese workers, local people of Hambantota have been growing
and selling Chinese vegetables such as Chinese cabbage, choy sum and kale.
The other massive project being financed by China in Sri Lanka, the Colombo Port
City, has led to apprehension that it would have a highly detrimental impact on the
coastline of Sri Lanka, erode marine biodiversity, fishery stocks and breeding sites.
Nearly 80,000 fishermen who make a living from the sea will be affected.Global Times, the mouthpiece of the Communist Party of China, has noted with
satisfaction that the Sri Lankan government has rejected the MCC offer. Attempts have
also been made to shift the blame on Sri Lanka itself for the debt crisis that Colombo
is facing, as independent researchers on China have found.
One of them is that the forex crisis is staring Sri Lanka in the faces because of its
weak economic foundation and excessive borrowing over a long time by the Lankan
government, along with an improper debt structure. Beijing has tried to absolve itself
of its responsibility behind the crisis facing Colombo with the excuse that after all China
has not forced Sri Lanka to borrow money. All the requests for loan had been made
by Sri Lanka in its capacity as a sovereign entity, so China cannot be blamed. ‘The
debt problem of a debtor country cannot be the responsibility of the creditor country,’
seems to be the approach.
There have also been attempts to shift the blame; on the U. S. with the argument that
Colombo finds itself in the debt trap because of the deep dependence of its economy
on the dollar, with 60 percent of the repayments of Sri Lanka to be made in U. S.
dollars. India has also been blamed for “masterminding” the debt trap theory, in view
of the worsening relation between China and India at the Line of Actual Control
between the two countries.
There are reports, however, that China has shed some crocodile tears over the
economy of Sri Lanka getting caught in a quagmire after hobnobbing with the BRI
projects of China: record inflation, soaring food prices and the sufferings of the people.
The key concern, however, is how such a negative situation would impact the attitude
of Colombo towards borrowings from China,and what it would mean for the ultimate
relation between China and Sri Lanka. There is concern that the experience of Sri
Lanka is prompting countries like Myanmar, Malaysia and Nepal to suspend Chinese
investment projects. The faulty investment models of China with low participation from
Sri Lanka have also been blamed, and the Sri Lanka’s adverse balance of trade with
China. In November 2021, for instance, Lankan export to China was $66 million while
the import from China was $507 million, resulting in a negative trade balance of $440
million for Colombo, according to data available from the Observatory of Economic
Complexity.