By Kapila Bandara
The United States is pushing China, Sri Lanka’s largest bilateral creditor, to help restructure the bankrupt country’s Chinese debt, currently convulsed by social and political unrest.
Anger turned into turmoil. Recklessly, the Sri Lankan government led by recalcitrant Podu Jana Peramuna waited for a default to argue for debt restructuring. The economy and the lives of Sri Lankans have been gutted.
US Treasury Secretary Janet Yellen, on her first visit to the Indo-Pacific region, said on Thursday it would be in China and Sri Lanka’s interests to settle the loans.
Dr Yellen spoke at a briefing in Indonesia where G20 finance officials met. She answered a reporter’s question about Sri Lanka’s debt. Some estimates place Sri Lanka’s debt to China at US$7.1 billion.
Dr. Yellen is the former head of the US Federal Reserve.
“So I don’t have anything specific on Sri Lanka, but China is, of course, a very important creditor of Sri Lanka. Sri Lanka is clearly unable to repay this debt. And I hope China will be willing to work with Sri Lanka to restructure the debt – it would probably be in China’s and Sri Lanka’s interest,’ Dr Yellen said.
“But more broadly, we do expect China to step up its role in debt restructurings eligible for treatment under the Common Framework. We haven’t seen much progress and part of what I intend to do over the next few days is to urge our G20 partners to put pressure on
China needs to be more cooperative in restructuring these unsustainable debts.”
The common framework Dr. Yellen referred to brings together official Paris Club and G20 bilateral creditors and assesses debt treatment on a case-by-case basis based on demands. The IMF and the World Bank support the negotiations. The framework aims to address issues of insolvency (the inability to repay debts) and protracted liquidity (access to finance, including in capital markets), as well as IMF-supported reforms.
IMF Managing Director Kristalina Georgieva also encouraged China to speed up debt relief for several countries, including Zambia.
How China treats Zambia, which defaulted on around $32 billion in debt in 2020, will have implications for Sri Lanka.
Zambia has requested assistance “under the Common Framework for Debt Treatment Beyond the Debt Service Suspension Initiative”. The debt service suspension initiative endorsed by the G20 and the Paris Club expired at the end of 2021. It temporarily halted debt service for the poorest countries.
China has now agreed to co-chair, with France, the 16-nation creditors’ committee formed on June 16 to discuss Zambia’s debt. Reuters reported that China held $5.78 billion of Zambia’s debt at the end of 2021, based on government data.
In a June 16 statement, the G20 stressed that it is important for Zambia’s private creditors and other official bilateral creditors, “to provide debt treatments under the Common Framework on terms at least as favorable , in accordance with the principle of comparability of treatment”. . This means that all creditors should be treated equally and that no creditor should receive more favorable treatment than the others. But, in reality, it is ambiguous and we are asking for more clarity in the definition of “comparability of treatment”.
Earlier this month, the IMF’s Georgieva told Reuters that China would be the “first to lose dramatically” if existing debt problems turned into a full-scale crisis.
Furthermore, in a blog, she argued that restructuring Chad’s debt could quickly set a precedent for other countries.
The IMF is advocating for greater debt transparency, arguing that without knowing what countries already owe and on what terms, creditors cannot make informed lending decisions. They will also be reluctant to participate in restructurings if they do not know the conditions granted to other creditors. The IMF has declared Sri Lanka’s debt unsustainable and the government and Central Bank of Sri Lanka, which have pushed the country into a corner, declared default on April 12. Rating agencies predicted an economic collapse, although then-central banker Mr. Nivard Cabraal and the ousted Gotabaya Rajapaksa-led regime lived in blissful denial.
Mr Cabraal famously told Reuters on December 1, 2021: “Reimbursements [for 2022] will go smoothly, we are confident that we will make these payments on time. There is absolutely no concern about that.” The accountant said 2022 economic growth would rebound to “above 5.5%”.
The economy collapsed and contracted. There is more pain on the horizon.
IMF researchers say post-default restructurings will lead to “the most severe and prolonged declines in GDP investment levels and credit to the private sector”. They predict cumulative contractions of 6, 40 and 23 percentage points from the pre-restructuring linear trend in the early years, respectively. “Furthermore, banking crises are more likely to occur as a result of post-failure restructurings,” they say.
Since the issuance of the first international sovereign bond of 500 million dollars in October 2007, under the presidency of Mahinda Rajapaksa, Sri Lanka’s debt has exploded above 50 billion dollars. Many issues were at high interest rates and most of the funds raised were pocketed by politicians and wasted on megalomaniac projects.
An IMF team, which visited June 20-30, noted that with public debt unsustainable, board approval would require adequate funding assurances from Sri Lanka’s creditors that sustainability debt will be restored.
|No debt crisis in Sri Lanka, Chinese scholars say
What a debt crisis, some mainland Chinese scholars ask, referring to Sri Lanka’s implosion, while others cite various strange and unrelated issues.
They avoid noting high interest loans, the role in alleged corruption in unsustainable projects such as Hambantota port and debt relief. It was, of course, Beijing’s close friend, Mahinda Rajapaksa, who first applied for a Chinese credit card. His successors, including Ranil Wickremesinghe, now interim president, followed the lifestyle of living beyond his means. Chinese companies have been accused in parliament of investing millions in Mahinda Rajapaksa’s election campaigns.
Jia Duqiang, an associate professor at the Chinese Academy of Social Sciences’ National Institute of International Strategy, told Chinese state media this week that “in particular, the crisis can be attributed to the country’s fragile economic structure, government’s flawed policies and inability to meet challenges, as well as adverse external factors”.
Professor Jia also said that “Sri Lanka’s industrial structure is not strong enough to withstand extreme external pressure as the service sector accounted for 59.67% of GDP in 2020, while the industrial and agricultural sectors accounted for only 26.25 and 8.36%. So, after the pandemic dealt a severe blow to the tourism sector and exports of cash crops suddenly declined due to the Russian-Ukrainian conflict, the country’s foreign exchange reserves began to decline rapidly.
According to Professor Jia, “one of the main reasons for the debt crisis is the government’s radical fiscal policy.”
He also said that China “sincerely hopes that Sri Lanka will overcome the difficulties and restore stability soon, and do what it can to help Sri Lanka through the crisis”, and notes that “as a friend in If needed, China has pledged to provide 10,000 tons of rice to Sri Lanka, which can feed 1.1 million students in 7,900 schools for up to six months. Indeed, Sri Lanka received 1,000 tonnes of rice and some medical supplies on June 8”.
In January, Fu Xiaoqiang, vice president of the China Institutes of Contemporary International Relations, in an opinion targeting the West, boldly declared that Sri Lanka “is not facing a debt crisis” despite “a debt relatively high”. Some media “have focused on the debt crisis”.
Sri Lanka is “facing a shortage of foreign exchange, not a debt crisis”, he said. China has helped Sri Lanka boost its economic and social development and will continue to do so, he said.
He says: “Western economies, not China and its Belt and Road Initiative, are Sri Lanka’s main creditors, as 54% of the country’s external loans came from the international capital market. Sri Lanka’s debt to China, about $3.38 billion in loans, represents about 10% of the country’s total foreign debt in US dollars. China is Sri Lanka’s fourth largest creditor, after international financial institutions, the Asian Development Bank and Japan.
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