Sri Lankan Crisis And The Chinese Debt Trap



Updated: April 5, 2022 12:49
Image Source: Idsa.in

By TNV Desk

Sri Lanka is facing its worst-ever financial crisis since independence. The army is deployed at petrol pumps as people die waiting for fuel. Lankan embassies are shut to cut costs and Colombo still turns to China for more loans.

The crisis in Sri Lanka became apparent after the pandemic, which halted international tourist traffic to the island nation, one of its main sources of foreign exchange. As a result of reckless borrowings from China to fund infrastructure projects, the country’s debts spiralled and foreign exchange reserves shrank.

The pandemic struck tourism, shattering Sri Lanka’s economic system, which was already stumbling under the weight of debt.

 

The Debt Equation

As the island nation faces an economic Armageddon, the Rajapaksa government seeks more Chinese money, pushing the country deeper into Chinese debt. Sri Lanka has already taken 16 IMF bailouts, second only to Pakistan. Lanka’s external debt stands at 45 billion dollars but reserves at less than 800 million dollars. It seems like an impossible gap to bridge.

The economic meltdown in the country has triggered an exodus of Sri Lankans, most people have taken to the streets as they struggle to make the ends meet.

Image Source: Idsa.in

What is the situation?

The cost of everything has shot up dramatically, food prices have gone up by 25%, Petrol up by more than 43% and Diesel by more than 45%. Drug prices are set by the government and it has approved a 29% hike in medicines. In February this year, Lanka’s foreign currency reserves dipped to $2.31 billion and inflation hit 15.1%. Schools have called off exams as they do not have enough paper for students to write on.

People protesting for the removal of the current government owing to the skyrocketing prices of basic commodities, eventually making ends meet difficult.

The government is controlled by one family, the Rajapaksas. The President is Gotabaya Rajapaksa, Prime Minister Mahinda Rajapaksa, Finance Minister Basil Rohana Rajapaksa, Irrigation Minister Chamal Rajapaksa, Youth and Sports Minister Namal Rajapaksa. According to an estimate, they control 75% of the country’s budget. This fact holds importance as what Sri Lanka borrowed in 2007, during the presidentship of Mahinda Rajapaksa, accounts for 38% of its foreign loans today. As Sri Lanka sinks into debt, the people are left with no choice but to hold the family-run government responsible, demanding their step down.

How did things come to such a pass?

The crisis in Sri Lanka became apparent after the pandemic, which halted international tourist traffic to the island nation, one of its main sources of foreign exchange. As a result of reckless borrowings from China to fund infrastructure projects, the country’s debts spiralled and foreign exchange reserves shrank. The pandemic struck tourism, shattering Sri Lanka’s economic system, which was already stumbling under the weight of debt.

In December 2021, Sri Lankan President Gotabaya Rajapaksa sought China’s assistance in the face of a worsening foreign exchange crisis, requesting a debt restructuring in a meeting with China Foreign Minister Wang Yi while China has apparently shown the door to Colombo.

Ironically, the Rajapaksa government dug its own grave by rejecting the Millennium Challenge Corporation (MCC) of the United States’ offer to extend a developmental assistance grant to Colombo, as the MCC Board of Directors terminated its USD 480 million contract with Sri Lanka in December 2020 due to a lack of partner country engagement.

Furthermore, China-backed projects in Sri Lanka are anticipated to add to the island’s financial burden. Furthermore, Sri Lankans are protesting against some of these projects that would have an impact on their livelihood.

 

Beijing and Colombo

Sri Lanka’s dollar reserves are down to less than 800 million. The island nation requires about 6.6 billion dollars for debt payments for this year alone. Between 2024 and 2026, it has to pay 26 billion dollars to creditors.

Lanka has sought two and a half billion dollars from China, one billion dollars in loan and one and a half billion dollars as a credit line. Sri Lanka wants China to restructure all loans and China remains non-committal on that front.

Since the beginning of the pandemic, Sri Lanka has taken 2.5 billion and now seeks another 2.5 billion dollars, which accounts for more than 5 billion dollars in 2 years. Sri Lanka has taken more than 10 billion dollars from China. The country’s total external debt is said to be more than 45 billion dollars.

Already lost the strategic Hambantota port to China, it is bound to lose more assets if it fails to pay. Experts suggest that with the Sri Lankan economy bleeding, China is eyeing the Colombo Port City.

Sri Lanka is a key part of China’s Belt and Road Initiative. The initiative is about a long-term plan to fund and build infrastructure, linking China to the rest of the world.

However, India, Sri Lanka’s long-standing neighbour and friend has stepped in to its rescue. India-Sri Lanka have signed a $1 billion line of credit pact in March 2022. Earlier this year, India extended a helping hand by providing financial assistance of $2.4 billion to Sri Lanka. A 40,000 MT fuel consignment was handed over by the Indian High Commissioner to the Sri Lankan Energy Minister, Udaya Gammanpila.

 

Reference Links:

  1. https://www.aninews.in/news/world/asia/sri-lanka-struggles-to-repay-loans-chinas-debt-trap-for-developing-countries20220117172650/
  2. https://www.wionews.com/south-asia/sri-lanka-getting-closer-to-india-to-deal-with-chinese-debt-trap-454776
  3. https://www.aninews.in/news/world/asia/india-extends-sri-lanka-financial-assistance-of-24-billion-usd-discusses-fishermen-issue20220208195940/
  4. https://www.bbc.com/news/business-59932551
  5. https://www.theguardian.com/world/2022/apr/01/sri-lanka-protesters-try-to-storm-presidents-house-as-economic-crisis-deepens
  6. https://www.aljazeera.com/news/2022/4/1/sri-lanka-economic-crisis-the-all-powerful-rajapaksas-under-fire

 

 

 

 

 

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