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Sri Lanka and Pakistan, the poster child for China’s Belt and Road Initiative over the past decade, have used Beijing’s high-interest loans to build the White Elephant project. Both countries are bankrupt today, and China has not shown the same enthusiasm for the Belt and Road Initiative to revive its economy with much-needed aid to weather a growing food and fuel crisis. With a very weak dollar, high inflation, and very high bank interest rates, these two countries are hitting the bottom of their economies. The economic crises in these two countries have taught lessons for Nepal, Bangladesh, the Maldives and Myanmar, where political leaders routinely descend on Beijing’s doorstep for infrastructure funding, and where the Chinese Communist Party is able to infiltrate the Indian subcontinent’s bureaucracy to their country. Advantage.
While the Exim Bank of India has stated in writing that its financing and debt relief to Sri Lanka will be in line with the IMF and the Paris Club, the Exim Bank of China has made it clear to Colombo that it will only provide a repayment moratorium of only two years rather than The 10-year moratorium recommended by the IMF’s Paris Club. The International Monetary Fund and the Paris Club suggested that Sri Lanka’s debt restructuring should be divided into 15 years.
That means the IMF’s $2.9 billion package to Sri Lanka in March, which will be reviewed six times a month over four years, is in jeopardy because of the state of China’s Export-Import Bank. The only other option is for the IMF to allow lending against sovereign arrears to save Sri Lanka from full blown economic and political chaos.
Sri Lanka owes at least $7 billion in debt to China, including loans from the China Development Bank, and the figure goes to another level if private debt is included. The unsustainable high-interest debt is the result of financial malfeasance and poor governance by the Rajapaksa regime, of which the current president, Ranil Wickremesinghe, was a big part in the past. As a result of the Rajapaksa family’s financial profligacy, Chinese high-interest money was used to build unsustainable White Elephant projects across the country, including Hambantota Port, Mattala Rajapaksa International Airport and Norochole power station. In 2022, public discontent with Rajapaksa has seen the rise of far-left fringe parties in the island nation. Basically, as in Pakistan, the political antidote is worse than economic malaise.
India made it clear in its letter to IMF Executive Director Kristalina Georgieva on January 16, 2023 that it would fully support the IMF and Paris Club’s debt sustainability analysis without any strings attached. However, the Modi government has made clear that the Sri Lankan authorities should seek fair debt treatment from all commercial creditors and other official bilateral creditors, as well as adequate financing contributions from multilateral development banks. A copy of India’s letter to the IMF has also been sent to Sri Lanka’s finance ministry.
India’s letter commits to continue negotiations with the Sri Lankan government and the Paris Club on medium to long-term debt disposal by extending the maturity and lowering the interest rate or any other financial action that can provide similar financing/debt relief.
India’s understanding of the IMF’s debt sustainability assessment is that it will be underpinned by the planned target of bringing Sri Lanka’s public debt-to-GDP ratio below 95% by 2032 and central government’s total annual financing needs below 13% . Average GDP in 2027-2032. In addition to this, the central government’s annual foreign currency debt service should be below 4.5% of GDP in 2027-32 to close Sri Lanka’s external financing gap.
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