Sri Lanka is again hurtling towards massive political turbulence, unable to secure the much-needed IMF loan next month, thanks to China. Beijing, the main ally and debtor of Colombo, while involved in the 20th party congress, has not begun a dialogue on debt restructuring with the island nation.
Financial analysts based in Washington say that Sri Lanka will likely miss the December IMF deadline and must wait for March 2023 to secure a $ 2.9 billion loan from the lending institution in eight equal tranches. Meanwhile, the Sri Lankan debt has increased further due to its currency depreciation, deep recession and swelling fiscal deficit. Since the end of 2021, inflation has considerably eroded the real value of domestic debt in the country that lies to the south of India.
Even as China dithers, debtors India and Japan initiated a dialogue with Sri Lanka on debt reconciliation and restructuring. China is yet to begin the dialogue, with the CPC that rules India’s northern neighbour busy in the 20th national party congress, leaving little time for client state Sri Lanka.
The total debt of Sri Lanka at the end of last year was $ 36 billion. Out of it, the island nation owes $ 7.1 billion to China or 20% of its debt. The total public debt, which was 115.3% of the GDP in end-December 2021, has now gone up to 143.7% of the GDP by end-June 2022. Of this, the bilateral debt has climbed from 12.7% of the GDP to 20.4% of the GDP.
On 31 October, President of Sri Lanka Ranil Wickremesinghe said, “Now, this is the process, we had to move. If we can move and come to an agreement by December, which means coming to an agreement by mid-November, and going up to the IMF Board in mid-December, we will gain a big advantage. However, I don’t know whether we can do it for the simple reason that in China, the focus has started now after the party conference. However, we must aim to have it by January.”
Wickremesinghe happens to be the lone MP of his party and close ally of the discredited Rajapaksa regime.
Sri Lanka will require $ 850 million to sustain until the next IMF board meeting in March. If it does not get this money, there will be public protests, as witnessed in July-August, and the ultra-leftist parties will gain an upper hand in the politics of Sri Lanka, as the opposition does not have the clout to stand up on its own.
So, where will the $ 850 million bridge funding to help Colombo survive till March 2023 come from?
Thanks to the Rajapaksas who have fled the country, Sri Lanka is now bearing their legacy of misgovernance, poor fiscal discipline and corruption. That regime had secured a 900 MW Norochcholia Power Station with Chinese help after taking a loan from Beijing apparently at 11% interest.
Along with the infamous seizure of its Hambantota port after Sri Lanka could not repay China for its uplift, Chinese ‘help’ has led the island nation to a deep economic crisis with little hope for recovery at least in the next five years.
Meanwhile, unlike China, India has had two rounds of talks with Colombo and is in discussion with another debtor Japan to ensure that Sri Lanka gets early relief. Colombo owes nearly $ 1.7 billion in bilateral debt to India and another $ four billion in emergency assistance as the Narendra Modi government has gone out of its way to keep the Island nation afloat. The BJP government took the initiative, ignoring Sri Lanka’s romance with India’s adversaries China and Pakistan in the Indian Ocean region.
Sri Lanka may be waiting for China to lift its ‘Zero Covid’ policy, which will permit Han Chinese tourists to spend money on the island nation, a small help in the course of efforts to revive its economy.