China holds out the olive branch to Sri Lanka after standoff
Posted on May 3rd, 2022

By P.K.Balachandran Courtesy NewsIn.Asia

Colombo, May 3: China, which had expressed displeasure over Sri Lanka’s approaching the IMF for a bailout without consulting it first, and had warned that its relations with Sri Lanka would depend on the conditions set by the IMF, has now revised its stand.

Beijing has realized that it cannot turn a blind eye to Sri Lanka’s plight and should join the rest of the world in helping it pull its economy out of the woods.ADVERTISEMENT

The Chinese Ambassador to Sri Lanka, Qi Zhenhong said told Lankan Finance Minister Ali Sabry on Monday that China would fully support Sri Lanka in securing the assistance of the (IMF). As a major shareholder of the IMF, China is willing to play an active role in encouraging the IMF to positively consider Sri Lanka’s difficulties and reach a proper agreement as soon as possible, Ambassdor Qi told Sabry.

China’s earlier stand would have alienated it from the bulk of Sri Lankans who expect the world to help them tide over an unprecedented economic crisis created by a severe shortage of forex.  

The Standoff

It is generally acknowledged that while India rushed to Sri Lanka’s help with funds and material aid, China was an idle spectator. China had cold-shouldered Sri Lanka’s appeal for debt repayment restructuring. The Chinese appeared to be making use of the crisis to get some of their long standing demands met. They probably thought that Indian help would run out in a few months, the IMF’s conditions would be painful and that the Sri Lankans would have to come back to China for funds in the not-too-distant future on China’s terms.  

Sure, the Chinese have genuine grievances against Sri Lankan regimes which need to be addressed. And China has its lending policies to keep in mind also.  But the lack of response from Beijing to pleas from Sri Lanka was depleting China’s political and social capital among Sri Lankans. It had eroded whatever soft power China had in the island nation.

Instead of debt restructuring, China had offered a US$ 1 billion loan to repay loans already taken from it, plus US$ 1.5 billion as credit for buying goods from China. When President Gotabaya Rajapaksa told the visiting Chinese Foreign Minister, Wang Yi, in January this year, that it would be a great relief” if China re-structured the repayment schedule, Wang did not commit himself. Instead, he stated that Sri Lanka should provide necessary conditions for Chinese investments, make the Colombo Port City and the Hambantota port engines of Sri Lanka’s industrial growth” and resume talks for an early conclusion of a Free Trade Agreement.

Recently, Ambassador Qi Zhenhong said that China would await the results of Lanka’s negotiations with the IMF, and went on to warn that Sino-Lankan bilateral relations would be shaped by the outcome of the negotiations with the IMF. He might have said this in the context of the IMF’s possible disapproval of Chinese loans which, in the West’s view, pushed developing countries into debt traps. The Ambassador then repeated Wang’s call for an early movement towards a Sino-Lankan FTA.

Pointing to another issue troubling Sri Lanka, the Lankan cabinet spokesman Nalaka  Godahewa said that the West’s reaction to any deal between Sri Lanka and China would also have to be considered by the Lankan government.  

Sri Lanka was thus caught between the devil and the deep blue sea. While it desperately needed IMF’s help, China could not be sidelined either. China and Japan are the second largest bilateral lenders to the island nation.

Views from China 

After Wang’s visit in January, the Chinese Communist Party-run Global Times quoted Song Wei of the Chinese Academy of International Trade and Economic Cooperation, as saying that only interest-free loans” are eligible for debt relief and that loans raised through the market are not.   

However, Song added that China may negotiate equity cooperation and rescheduling,” thus indicating the existence of a window of opportunity for debt rescheduling.

According to Sri Lankan diplomats, talks with China on rescheduling and related matters would start after the current holidays in that country. In addition, the Lankan Prime Minister Mahinda Rajapaksa told his Chinese counterpart, Li Keqiang, that Sri Lanka will begin working on restarting talks on the FTA which had been suspended in 2018.  

China lends to Sri Lanka for interest, although the rates are generally low (at 2% according to economist Umesh Moramudali). There are no interest-free loans. And grants have been few and far between. Therefore, China will have difficulty finding ways to restructure its loans to Sri Lanka. But it has compromised on its principles earlier in the case of some other countries, especially Africa.

According to Deborah Brautigam and Yinxuan Wang (Global Debt Relief Dashboard: Tracking Chinese Debt Relief in the COVID-19 Era, China Africa Research Initiative (CARI), Johns Hopkins University School of Advanced International Studies, Version 1.6, January 2021), Chinese debt relief falls into four categories: the G20 Debt Service Suspension Initiative (DSSI); debt cancellation under the Forum on China Africa Cooperation (FOCAC); ad hoc debt relief; and contributions to the IMF’s Catastrophe Containment and Relief Trust.

Debt relief can involve renewal/refinancing by which the outstanding balance of a loan is transferred to a new loan agreement; re-profiling /rescheduling (extending the repayment time, but not reducing the net present value of the debt – all DSSI treatments fall into this category); restructuring (changes in the terms that result in a reduction in the net present value) or debt forgiveness (reductions in the principal, which can be partial or complete).

Four Chinese lending institutions have participated in debt restructuring so far: The Export-Import Bank of China (Eximbank) China Development Bank; (CDB); Industrial and Commercial Bank of China (ICBC); and China International Development Cooperation Agency (CIDCA).

According to the Jubilee Debt Campaign UK, China has suspended US$ 5.7 billion in debt, accounting for more than half of the world’s total.

But Sri Lanka is not entitled the G20 Debt Service Suspension Initiative (DSSI). However, Ecuador, which was not eligible for DSSI, received a grace period on a loan with the China Development Bank in August 2020, which allowed the postponement of US$ 417 million in payments for one year. Ecuador also reached an agreement with the China Eximbank to defer US$ 474 million in payments between September 2020 and the end of 2021.

Venezuela was also not eligible for DSSI. But according to Reuters, in August 2020, Venezuela reportedly won a grace period until the end of 2020 from Chinese banks on some of its US$ 19 billion in oil-secured loans. This deferred US$ 3 billion in 2020 loan repayments, mainly to the China Development Bank.

Chinese banks renewed maturing commercial loans to Pakistan. China also renewed its three-year bilateral currency swap with Pakistan to support Pakistan’s debt sustainability. But Beijing refused to restructure terms for several Belt and Road Initiative (CPEC) power plant projects with Chinese investment. According to Deborah Brautigam and Yinxuan Wang, the China Development Bank reportedly increased a credit line by US$ 700 million and lowered the interest rate and delayed the repayment timeline by two years.”

Therefore, there are chances of China’s considering ways and means of helping Sri Lanka face the unprecedented crisis it is undergoing. Ambassador Qi Zhenhong’s assurance to Minister Ali Sabry on Monday, is an early sign of that.

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