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Sri Lanka signs $ 500 m loan agreement with China 

13 Apr 2021

The Sri Lankan Government yesterday (12) signed a $ 500 million loan agreement with China Development Bank (CDB), in a move to strengthen the country’s deteriorating foreign reserves.  “The $ 500 million loan is geared to infuse vitally-required foreign exchange into the Sri Lankan economy. In addition, to help the Government facilitate rapid economic recovery efforts, to boost investor confidence, and strengthen currency,” as noted in a statement issued by the Sri Lankan Embassy in China.  Sri Lanka had requested a $ 700 million loan from the China Development Bank (CDB) last year. Out of this, $ 500 million was set to be provided to the country in the form of dollar credit this month, while the remaining $ 200 million is expected to be issued in the form renminbi-denominated credit to the country during Sri Lankan President Gotabaya Rajapaksa’s upcoming visit to China.  In addition to the $ 700 million requested from CDB, People’s Bank of China recently approved a swap facility of $ 1.5 billion to the Central Bank of Sri Lanka. This agreement, signed between the Central Bank of Sri Lanka and the People’s Bank of China, is valid for three years, and the deal was made during a time Sri Lanka was struggling with the Covid-19 pandemic.  The swap facility, as confirmed by the Central Bank, was in Chinese currency, which faced wide criticism from local economists and the Opposition, as Sri Lanka could only settle debts incurred on imports from China using this particular swap as most of Sri Lanka’s external invoices are in US dollars.  China has further agreed to provide a $ 989 million loan to Sri Lanka to build an expressway that will connect its tea-growing 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. Accordingly, as per the study conducted by the Chatham House, reports claim that the cumulative value of Chinese infrastructure investment to Sri Lanka amounted to $ 12.1 billion between 2006 and July 2019.  In 2018, the Sri Lankan Government obtained a $ 1 billion syndicated loan from the China Development Bank (CDB). This loan was obtained at the USD LIBOR six-month interest rate (a global benchmark), plus a margin of 2.56% per annum and a payback period of eight years. Sri Lanka plays a vital role in China’s “Belt and Road” (BRI) global infrastructure-building initiative and has provided billions of dollars in loans for Sri Lankan projects over the past decade. The projects include a seaport, airport, port-city, highways, and power stations.  However, Sri Lanka is still liable to repay nearly $ 4.5 billion in foreign debts annually until 2025 and due to the increasing number of Chinese projects in Sri Lanka, critics have lambasted China’s BRI as being a “debt trap”.

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