Professor says Sri Lanka ‘cannot get out of the crisis without China’

Sri Lanka will not be able to solve its debt restructuring problems without help from China as the country teeters on the brink of economic collapse, according to analysts.

Sri Lanka has defaulted on its debtsThis plunged the island nation into its worst financial crisis since independence in 1948. In addition to fuel shortages, the country also faces the prospect of running out of food, basic foodstuffs, and medicine.

Public frustration with the deepening economic crisis has spilled over into raging street protests in recent months. President Gotabaya Rajapaksa, who has been blamed for economic mismanagement, was forced to resign and flee abroad last week. Rising anger towards his government.

Acting President Ranil Wickremesinghe declared a state of emergency on Sunday in a bid to quell protests ahead of a vote in parliament on Wednesday to elect a new leader.

Umesh Muramudali, lecturer at Colombo University, said China’s willingness to provide significant debt relief to Sri Lanka would be vital to speed up debt restructuring and help the country emerge from its current situation.

You cannot get out of this crisis without China.

Umesh Muramudali

Lecturer, University of Colombo

“You can’t get out of this crisis without China,” Muramodali told CNBC’s “Streets Signs Asia” on Tuesday. “China needs to agree to restructure their debt, and that’s not their usual way of taking it.”

Belt and Road

China has invested billions in Sri Lanka under the Belt and Road Initiative. The massive infrastructure program was launched in 2013 and aims to build ports, roads, railways and pipelines across Asia, Europe and Africa.

“Sri Lanka needs to reach a common framework and what the international community insists on is that China also agree to a common framework for debt restructuring,” Muramudali added. “It is not yet clear what level of negotiations we are in, especially with China,” he added.

At a regular press conference last week“Shortly after the Sri Lankan government announced the suspension of international debt payments, Chinese financial institutions have communicated with the Sri Lankan side and expressed their willingness to find an appropriate way to deal with outstanding debts related to China. And help Sri Lanka to overcome difficulties,” Chinese Foreign Ministry spokesman Wang Wenbin said. current”.

People march in Colombo on July 9, 2022 to protest the ongoing economic crisis in Sri Lanka.

Aqila Jayawardana | NurPhoto via Getty Images

In a high-profile case, Beijing acquired a strategic port in 2017 When Sri Lanka failed to service its debts.

Critics have accused Beijing of what they call a “debt trap,” saying that countries that owe money to China may have to sign up on their national territory or make big concessions if they can’t repay. China denies the allegations.

Sri Lanka said that as of April last year, China accounted for about 10% of its total debtBut Muramudali actually said that’s probably not the case.

“I mean that 10% is also an understatement,” he said, emphasizing that More research He gave a more accurate picture of China’s lending to Sri Lanka.

“Sri Lanka [debt] For Chinese creditors it comes in about 20%, not 10% really. So all of this 20% needs to be restructured. This means that you will have to look at how the China Development Bank handles the restructuring and that the Exim Bank of China will handle the restructuring.”

– tragic mistakes

While China is probably willing to engage in debt rollover or debt refinancing, it is not willing to tolerate restructuring because of the precedent that will set it.

Achilles Perry

Asia Society Policy Institute

“China, of course, is a very important creditor of Sri Lanka. It is clear that Sri Lanka is unable to repay this debt. I hope that China will be willing to work with Sri Lanka to restructure the debt – it is likely that both will be in the interests of China and Sri Lanka,” Yellen said at a press conference.

Political observers assert that Sri Lanka is currently in a difficult position with regard to debt owed to China.

“One of Sri Lanka’s tragic mistakes in 2020 was when the pandemic hit, it did not engage in restructuring negotiations with its creditors,” Achilles Berry, director of South Asia Initiatives at the Asia Society Policy Institute, told CNBC. Tuesday.

He said it was known at that point that debt was unsustainable.

“Another arrogance that came on behalf of the politicians in Sri Lanka believes that China will help them and restructure their loans,” Perry added.

“While China is probably willing to engage in debt renewal or debt refinancing, it is not willing to tolerate restructuring because of the precedent that will set it.”

IMF bailout plan

According to central bank data Obtained by ReutersSri Lanka currently has about $2 billion in foreign exchange reserves versus $7 billion in total debt maturing this year, including $1 billion in bonds due in July.

Acting President Wickremesinghe said Monday that the country is close to finalizing talks with the International Monetary Fund on possible debt relief.

Wickremesinghe’s office said negotiations with the International Monetary Fund “are coming to an end, and discussions with donor countries are progressing.” In a post on Twitter.

“The [IMF] Negotiations will resume as soon as a new government is formed. It will not be finished as quickly as the acting president says. “I think we all need to acknowledge that because it will take maybe two months to finalize the deal,” Muramodali said.

In June, the International Monetary Fund ended its talks with Sri Lanka After failing to conclude A bargain for a rescue package.

“The IMF has been lax during the pandemic,” Perry said. “He will look for some tough measures, including tax increases, including anti-corruption measures and maybe even central bank independence,” he added.

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