Sri Lanka ‘cannot get out of crisis without China,’ says professor

Analysts say Sri Lanka will not be able to solve its debt restructuring problems without help from China as the country teeters on the brink of economic collapse.

Sri Lanka has defaulted on its debts, plunging the island into its worst financial crisis since independence in 1948. In addition to a fuel shortage, the country also faces the prospect of running out of food, basic necessities and medicines.

Public frustration over the deepening economic crisis has spilled over into furious street protests in recent months. President Gotabaya Rajapaksa, blamed for the economic mismanagement, was forced to resign and fled abroad last week as anger at his government mounted.

Acting President Ranil Wickremesinghe declared a state of emergency on Sunday in a bid to quell protests ahead of a vote in parliament on Wednesday to elect a new leader.

China’s willingness to provide significant debt relief to Sri Lanka will be vital to accelerate debt restructuring and help the country move out of its current predicament, said Umesh Moramudali, a lecturer at the University of Colombo.

You cannot get out of this crisis without China.

Umesh Moramudali

lecturer, University of Colombo

“You can’t get out of this crisis without China,” Moramudali told CNBC’s “Streets Signs Asia” on Tuesday. “China must agree to restructure its debt, which is not their usual path.”

Belt and road

China has invested billions in Sri Lanka under its Belt and Road Initiative. Launched in 2013, the massive infrastructure program aims to build ports, roads, railways and pipelines in Asia, Europe and Africa.

“Sri Lanka needs to come to a common framework and what the international community is urging is that China also agree to a common framework for debt restructuring,” Moramudali added. “It is not yet entirely clear what level of negotiation we are at, especially with China.”

Speaking at a regular press conference last week, Chinese Foreign Ministry spokesman Wang Wenbin said that “Shortly after the Sri Lankan government announced the suspension of international debt payments, Chinese financial institutions contacted the Sri Lankan side and began willing to find a good way to deal with the past debts related to China and help Sri Lanka overcome the current difficulties.”

People march in Colombo on July 9, 2022 to protest against the ongoing economic crisis in Sri Lanka.

Akila Jayawardana | NurPhoto via Getty Images

In a high-profile case, Beijing took over a strategic port in 2017 when Sri Lanka failed to repay its debts.

Critics have accused Beijing of what they call a “debt trap,” saying countries that owe money to China may be forced to sign over national territory or make hefty concessions if they can’t pay. China denies those allegations.

Sri Lanka said China accounted for about 10% of its total debt in April last year, but Moramudali said that in reality this is unlikely to be the case.

“I mean, this 10% is also an underestimate,” he said, underlining that further research provided a more accurate picture of China’s lending to Sri Lanka.

“Sri Lanka” [debt] to Chinese creditors comes about 20%, not really 10%. So all this 20% will have to be restructured. That means you have to look at how China’s Development Bank will deal with restructuring and China’s Exim Bank will deal with restructuring,” he added.

‘Tragic mistakes’

While China may be willing to shift or refinance debt, it is unwilling to restructure because of the precedent it will set.

Akhil Bery

Asia Society Policy Institute

“China is of course a very important creditor to Sri Lanka. Sri Lanka is clearly unable to repay that debt. And I hope China will be willing to work with Sri Lanka to restructure the debt – it probably would both in the interest of China and Sri Lanka,” Yellen told a news conference.

Political observers underline that Sri Lanka is currently in a difficult position due to its debts to China.

“One of Sri Lanka’s tragic mistakes was in 2020, when the pandemic hit, it was not involved in restructuring negotiations with its creditors,” Akhil Bery, the director of South Asia Initiatives at the Asia Society Policy Institute, told CNBC’s “Squawk Box Asia”. on Tuesday.

He said it was known at the time that the debt was unsustainable.

“The other hubris that came on behalf of Sri Lankan politicians is of the opinion that China would help them and restructure their loans,” Bery added.

“While China may be willing to roll over or refinance debt, it is unwilling to undertake restructuring because of the precedent it will set.”

bailout of the IMF

“The [IMF] negotiations will resume as soon as there is a new government. It won’t be completed as quickly as the acting president says. I think we should all recognize that because it may take a few months to finalize the agreement,” Moramudali said.

In June, the IMF ended talks with Sri Lanka after it failed to negotiate a deal for a rescue package.

“The IMF was lenient during the pandemic,” Bery said. “It will look for some tough measures, including raising taxes, including anti-corruption measures and possibly even central bank independence.”