Sri Lanka Debt Crisis: It would be sheer folly to underestimate China's machinations

Sri Lanka had eagerly lapped up Chinese loans when the powerful Rajapaksas helmed the government only adding to Colombo’s economic woes, even as Beijing ruthlessly focused on increasing its footprint in the island nation. (File image)

There was a collective sigh of relief from Sri Lanka and its bilateral creditors after the Executive Board of the International Monetary Fund (IMF) finally approved a nearly $3 billion bailout package on March 20 for the bankrupt island nation to revive its battered economy. Under the Extended Fund Facility (EFF) of the IMF, the nation will get this assistance over a four-year period. There was uncertainty about the EFF coming through as China, Sri Lanka’s biggest bilateral creditor, hemmed and hawed about giving the debt restructuring assurance. While Sri Lanka’s other major bilateral creditors, including India and the Paris Club, were swift to convey their financing assurances, China who otherwise wants to be seen as the island nation’s ‘benefactor’ dragged its feet on the matter.

Debt Trap Diplomacy

Why was China dithering, having assiduously worked over the years to woo the strategically-located nation straddling vital sea lanes in the Indian Ocean with its ‘debt trap diplomacy’? Most certainly because China, known for the opacity of the loans it extends to cash-strapped nations to build infrastructure, is reluctant to share the finer details of the arrangements it enters into with debtor nations, often leaving them struggling or unable to repay the loans. Sri Lanka, having eagerly lapped up Chinese loans when the powerful Rajapaksas helmed the government, and even joining Beijing’s Belt and Road Initiative (BRI), is a case in point. The loans only added to Colombo’s economic woes, even as Beijing ruthlessly focused on increasing its footprint in the island nation. The China-funded Hambantota port, Mattala Rajapaksa airport and Norochcholai coal power plant have come at huge financial costs for Sri Lanka. While forced to give the port on long lease to a Chinese state-owned company after being unable to service the loan, Mattala has also become a ‘white elephant’.

The Chinese reluctance to give a second assurance – it had given one earlier in January like other creditors – raises serious doubts about its commitment to Sri Lanka’s debt sustainability and whether it will adhere to transparency in the procedures involving the bailout. India has already expressed valid concerns about the Chinese approach in a statement it issued after the IMF approved the EFF. While not naming China, India said it “would expect all concerned to engage in the forthcoming process of restructuring of Sri Lankan debt in the spirit of transparency and comparability of treatment for all external creditors. That will ensure that no side arrangements are made with any creditor".

Bilateral Creditors Worry

Indian anxieties would be shared by other bilateral creditors too, worried as they would be about China striking a separate deal with the island nation which would enable it to fiddle around with the bilateral debt by converting a portion of it into a commercial debt. This would mean that only the bilateral debt, which is a government-to-government deal, would come under the scrutiny of Sri Lanka’s international creditors. The debt portion converted into a commercial one would move out of the ambit of the committee of creditors, an informal group of Sri Lanka’s bilateral creditors that will oversee efforts to help the nation tide over its external debt crisis. This, in turn, would stymie efforts by the creditors’ committee to ensure that all bilateral creditors are given the same treatment by Sri Lanka. President Ranil Wickremesinghe has assured bilateral creditors that there will be transparency in communications with regard to the debt treatment terms that his country enters with creditors. He will need to walk the talk on this assertion.

An even bigger test of Chinese commitment to the IMF programme will be at the outset itself. Will it join the creditors’ committee? For, being part of this panel will mean that China will have to agree to Sri Lanka’s debt restructuring as required by the IMF. China will be fearful that this could trigger calls by African nations to whom it has extended massive loans – for infrastructure under the BRI – to restructure their debts too. These loans have been extended at extremely high rates of interest, leaving nations trapped in huge debts. China would certainly not want to be seen restructuring such debts as it would also mean conceding the unviable, unproductive nature of projects under the BRI, in effect conceding to the failure of this grand initiative. India’s other immediate neighbours have also jumped onto the BRI bandwagon in their quest to bolster their infrastructure. But they would do well to remember the perils involved.

And when push comes to shove, China may not be there to bail them out, as was the case in Sri Lanka. In the months after Sri Lanka’s economic collapse, India pulled out all stops to provide the close neighbour with much-needed financial assistance. Among other things, India gave the island nation $4 billion of short-term credit, $500 million to import fuel, $55 million to import urea and another $1 billion line of credit to import essential commodities in 2022. Beijing’s contribution was piffling in comparison. For now, India has managed to earn a lot of goodwill among Sri Lankans while countering China’s influence in the island nation. But it would be sheer folly to underestimate China's machinations.

Parul Chandra is a New Delhi-based senior journalist who writes on foreign affairs. Views are personal, and do not represent the stand of this publication.