Can India’s line of credit save the island’s flagging economy reeling from Chinese debt?
Sri Lanka, the Indian Ocean littoral state whose economy depends mainly on tourism, has been ravaged by debt and a depleted foreign exchange reserve, to the point that the country is facing a massive shortage of food and fuel.
The pandemic has deepened the economic crisis that had already been simmering since 2019. While the island nation reached out to two of its most trusted partners, only one came to its aid.
The country’s energy minister, Uday Gammanapila, issued a statement on January 17 saying the whole country would be plunged into darkness by January 19, according to the Daily Mirror. Due to the shortage of fuel in Sri Lanka, the Sapugasakanda thermal power plant was forced to stop its activities.
India has reached out to help save its neighbor from drowning in darkness. According to the Indian High Commission in Sri Lanka, New Delhi has offered Colombo $500 million to buy petroleum products as it considers a potential nationwide blackout due to a fuel shortage .
A friend reaches out his hand again!!! Boost the bilateral economic partnership,#India offers a line of credit of 500 mn USD to 🇱🇰 for the purchase of petroleum products. Critical support for 🇮🇳 follows discussion between EAM @DrSJaishankar &Honourable Late Minister @RealBRajapaksa 1/2 pic.twitter.com/5YrHee1VuI
— India in Sri Lanka (@IndiainSL) January 18, 2022
Help from India came at an opportune time. This aid is in addition to the credit previously promised by India to alleviate the economic difficulties of Sri Lanka.
Earlier, after Sri Lankan Finance Minister Basil Rajapaksa and Indian External Affairs Minister S. Jaishankar met, the two sides came up with a “four-pronged” plan that included credit lines for fuel imports , food and medicine, the currency of India’s swaps and debt rollovers to Sri Lanka, and the completion of the Trinco oil farms project.
Sri Lanka’s crumbling economy
India has provided a $900 million loan and another $1.5 billion for two lines of credit to help Sri Lanka buy food and fuel. When the aid decision was made, Colombo had not yet decided whether to pay the debt to the tune of $500 million or respond to calls for its postponement to meet the country’s urgent needs.
Failure to pay the loans would have resulted in default. It was a test for Sri Lanka, whose credit rating had been downgraded.
Finally, Sri Lanka’s central bank announced on January 18, 2022 that the country had repaid a $500 million International Sovereign Bond (ISB) that needed to be settled, preventing a major default amid the growing foreign exchange crisis of the island nation and the spiral. external debt.
Nevertheless, Indian aid came at a time when Sri Lanka desperately needed it and helped her decide whether she could afford to repay or not.
❗️Daily power outages lasting about 04 hours are likely if Sri Lanka fails to secure a large USD loan at least by March 2022.
The country must be ready to make sacrifices now itself, and politicians must lead by example.
— Dasuni Athauda (@AthaudaDasuni) January 21, 2022
The Indian Ocean island is currently facing its worst economic crisis in history, which includes a credit crunch, falling GDP due to COVID-19 losses in tourism, exports and remittances. , the decrease in foreign exchange reserves from $7.5 billion in 2019 to $1.6 billion in November. 2021 and looming debt repayments of over $7 billion in 2022. Although he has paid the current debt, another payment is due in July of this year.
Sri Lanka is said to have approached two of its closest partners, India and China. While India provided the requested assistance, China remained evasive to Colombo’s request.
Interestingly, a significant portion of the debt that Sri Lanka is expected to settle this year is Chinese loans. Foreign analysts have long pointed out how badly the island nation has suffered from China’s debt trap.
China’s mixed response
Sri Lanka is a key part of China’s Belt and Road Initiative and, in a way, its most convenient gateway to the Indian Ocean Region (IOR). Over the previous decade, China provided Sri Lanka with more than $5bn (£3.7bn) for infrastructure projects such as roads, airports and ports. However, critics say the funds have been spent on ineffective initiatives with miniscule returns.
After the international financial markets, the Asian Development Bank and Japan, China is Sri Lanka’s fourth largest lender. Everyone knows how Beijing took control of its strategic assets such as Hambantota Port and the port city of Colombo using its debt trap.
Earlier this month, Chinese Foreign Minister Wang Yi was visiting Sri Lanka when the latter made a series of demands on China to overcome the economic crisis. Sri Lankan President Gotabaya Rajapaksa reportedly asked China to consider debt restructuring.
Sri Lanka recently announced that it was in talks with Beijing for a large loan from China to deal with its massive debt. #AFDaily
For the biggest economic stories of the day from Asia, read our newsletter: https://t.co/9eMyYmf0Sp pic.twitter.com/UX8qlUROOB
—Asia Financial (@Asia_Financial) January 19, 2022
China was also asked to provide “concessional” terms for its exports to Sri Lanka, which totaled around $3.5 billion last year, the statement said, but no further details were provided. according to a BBC report.
While Beijing reportedly agreed to a $1.5 billion currency swap, it effectively ignored Colombo’s request for a debt restructuring review.
China and Sri Lanka pledge to further develop their bilateral relations, carrying on the spirit of the rubber-rice pact https://t.co/lkl9avdj0i pic.twitter.com/HybUytUCJE
— China Xinhua News (@XHNews) January 10, 2022
The West has often referred to Chinese lending to Sri Lanka as a vast effort to trap the country’s debt in a bid to acquire its strategic assets.
“The Chinese have launched a line of criticism saying that the US and Indian media are exaggerating SL’s debt trap and it’s really the result of SL’s own borrowings over the years, mismanagement and due of the impact of the 2019 terrorist attacks and the COVID-19 pandemic.
The claim is that China is only Sri Lanka’s fourth largest creditor after international financial institutions, the Asian Development Bank and Japan. Here, the fact of the rate of growth of this debt owed to China is conveniently ignored – China has become a major creditor in a very short time.Jabin T Jacob, Associate Professor, Department of International Relations and Governance Studies, Shiv Nadar University, told the EurAsian Times.
“The fact that SL had never been forced to cede sovereign territory for a 99-year lease is also ignored. And China was a willing party to this arrangement despite its own history of the “century of humiliation in which the Qing Empire had to lease various parts of its territory to Western colonial powers, sometimes for 99 years.
“The general idea seems to be to blame the West for its colonial past, to denigrate the United States and India for their seemingly hegemonic intentions while expecting everyone to ignore China’s recent history. in terms of territorial aggression and expansion.. This one-sided narrative is gaining popularity in the Indian neighborhood due to the Chinese government’s extensive propaganda efforts, not only in English, but also in local languages.added Jacob.
Sri Lanka was forced to lease the port of Hambantota to state agency China Merchants for 99 years after it was unable to repay its annual EMI on the Chinese loan.
Perhaps Sri Lankans might start to notice something similar happening in the port city of Colombo, where a $1.4 billion investment by the China Harbor Engineering Company to reclaim 660 acres of land has enabled the Chinese company to receive 43% of the project on a 99-year lease, according to the Print.
Sri Lanka faces a daunting task to simultaneously balance its ties with India and China. Earlier, it handed over the East Container Terminal of the Port of Colombo to China, much to India’s shock and dismay. India had to settle for the inconsequential West Container terminal, which was bagged by Adani Group.
This was seen as a diplomatic defeat of India against China at the time, as ECT has much greater strategic value due to its location near the financial port city developed by China. This would have balanced Chinese power with Indian and Japanese presence.
However, in the worst times for Sri Lanka, India seem to have redeemed themselves against China. While Beijing is pinning its BRI hopes on Colombo for its forays into the IOR, its lukewarm response to Colombo’s plea for help certainly sends the wrong signal.
Moreover, Western accusations of debt trapping by China may now resonate with Colombo’s rulers who, so far, have denied all such allegations and maintained a neutral stance in the region, at least in terms of diplomatic.
It is an open secret that China is seeking to increase its presence in the IOR, which India has traditionally seen as its backyard and natural sphere of influence.
While India has pushed the buttons to prevent China’s rise in the IOR similar to that of the South China Sea and the Pacific, it has so far avoided scorning Colombo.
If the Indian government’s readiness with the aid and its statements about its friendship with Sri Lanka is anything to go by, it could lead to a strategic shift in the region.
Although bilateral differences still exist between India and Sri Lanka, New Delhi has proven its determination to help all of its neighbours.