Rajapaksas and Chinese debt

05 Dec 2021

Rajapaksas and Chinese debt

05 Dec 2021

By Yakuta Dawood The Sri Lankan authorities are presently involved in a battle to contain the worsening of the financial crunch resulting from the Covid-19 pandemic, but what is ingrained in people’s minds is whether Sri Lanka will be descending into a debt trap that the Government will one day have a hard time recovering from. Since assuming duties in 2019, President Gotabaya Rajapaksa has desperately turned to China for a helping hand on more than just one occasion, regardless of the mounting debt from China that has been piling up over the decades. Sri Lanka received the initial funding to offset the challenges endured by the pandemic and to pay off its looming debt repayments during March 2020. Accordingly, the People’s Bank of China had approved a swap facility of $ 1.5 billion to the Central Bank of Sri Lanka (CBSL), which is valid for three years. Speaking on this occasion, former State Minister of Money and Capital Market and State Enterprise Reforms Ajith Nivard Cabraal stated that they were “happy to confirm that the People’s Bank of China has approved a swap facility of ¥ (yuan) 10 billion ($ 1.5 billion) to the Central Bank of Sri Lanka”. According to Finance Ministry sources, we were informed that this swap agreement was put in place to maintain sufficient short-term foreign exchange liquidity whilst preserving the foreign currency reserves position of the country. Expressing concerns over this swap facility, former State Minister of National Policies and Economic Affairs Dr. Harsha de Silva told The Sunday Morning Business that this swap is a “plaster solution” that has been put forth by the current Government. “The Government needs to map out a medium to long-term debt restructuring plan to obtain sustainable confidence in the international market,” he added. Similarly, former Minister of Finance Mangala Samaraweera in a tweet posted on 11 March questioned the currency composition and the time period of the swap. “Instead of working out a credible economic recovery programme with the International Monetary Fund (IMF), Sri Lanka buys time from the looming economic apocalypse with a $ 1 billion currency swap with China,” Samaraweera tweeted. Nevertheless, just after this confirmation, Sri Lanka received the $ 500 million in April out of the $ 700 million swap agreement from China Development Bank (CDB). Issuing a statement following this, the Sri Lankan Embassy in China said: “This loan will infuse vitally required foreign exchange into the Sri Lanka economy. These funds will help with Government efforts to facilitate rapid economic recovery following the setbacks caused by the Covid-19 pandemic.” Speaking to The Sunday Morning Business recently, Treasury Secretary S.R. Attygalle stated that the remaining $ 200 million was also received by Sri Lanka. Even this swap facility, as confirmed by the Central Bank, was in Chinese currency and had faced widespread criticism from local economists and the Opposition, as Sri Lanka could only settle Sri Lanka’s imports from China using this particular swap, since most of Sri Lanka’s external invoices are in US dollars. In addition to all these funds, China had further agreed to provide a $ 989 million loan to Sri Lanka to build an expressway that will connect its central region to the Chinese-run seaport, which is part of Beijing’s plan for a line of ports stretching from Chinese waters to the Persian Gulf. Addressing the concerns over this project to an international media platform – Nikkei Asian Review – Dr. de Silva had criticised the decision to borrow for the aforementioned road project. "Such projects are not priorities for the moment. This loan is just to improve roads already built, and we can always improve the roads later," de Silva told the Nikkei Asian Review. As a recent measure, it was learnt by The Sunday Morning Business that the Government of Sri Lanka is to secure another ¥ 1.5 billion (approximately $ 300 million) loan from China. Highly placed government sources, when queried, confirmed to us that the Cabinet had given the green light for the signing of the loan agreement with China. The Government is confident of securing this loan in December. As of 2019, Sri Lanka’s total debt to China is $ 3,387 million (LKR 615 billion). Verité Research (Pvt.) Ltd., issuing a publication on “Navigating Sri Lanka’s debt” in February 2021, stated that in Sri Lanka, government financial reports do not provide ready visibility regarding the composition of external public debt by the indebted institution or by the lender. Therefore, the report revealed that the above-mentioned numbers exclude the debt owed to China by Sri Lanka’s state-owned enterprises (SOEs). According to the report, the debt owed by SOEs to China amounted to $ 2,042 million (LKR 371 billion) as of 31 December 2019. “When this debt is taken into consideration, the Sri Lankan Government’s total debt to China – that is public debt – increases by 60% to $ 5,429 million (LKR 986 billion). This example demonstrates that the failure to properly report public debt owed by SOEs can lead to a significant understatement in the reporting of Sri Lanka’s actual debt obligations,” the report added. Giving the concluding remark, the report emphasised that, as Sri Lanka prepares to navigate the most challenging period the country has faced in terms of debt management, improving the reporting of debt to better reflect the actual debt position and dynamics is an important first step in the path to a solution.

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Rajapaksas and Chinese debt

Rajapaksas and Chinese debt

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