China Offers Olive Branch to Sri Lanka After Standoff – Analysis – Eurasia Review

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Offers help to make a good deal with the IMF

China, which had expressed dissatisfaction that Sri Lanka had approached the IMF for a bailout without consulting it first, and had warned that its relations with Sri Lanka would depend on conditions set by the IMF, now revised its position.

Beijing realized it couldn’t turn a blind eye to Sri Lanka’s plight and should join the rest of the world in helping it get its economy out of the woods.

Chinese Ambassador to Sri Lanka Qi Zhenhong told Lankan Finance Minister Ali Sabry on Monday that China will fully support Sri Lanka in seeking assistance from the (IMF). As a major IMF shareholder, China stands ready to play an active role in encouraging the IMF to look positively at Sri Lanka’s difficulties and reach a proper agreement as soon as possible, Ambassador Qi told Sabry.

China’s earlier stance would have distanced it from the majority of Sri Lankans who expect the world to help them weather an unprecedented economic crisis created by a severe shortage of foreign currency.

The dead end

It is generally accepted that while India rushed to the aid of Sri Lanka with funds and material aid, China was just an idle spectator. China has rejected Sri Lanka’s call for debt repayment restructuring. The Chinese seemed to be taking advantage of the crisis to meet some of their longstanding demands. They probably thought Indian aid would run out in a few months, IMF terms would be tough, and Sri Lankans would have to come back to China for funds in the not-too-distant future on Chinese terms.

Of course, the Chinese have real grievances against the Sri Lankan regimes that need to be addressed. And China also needs to keep its lending policies in mind. But Beijing’s lack of response to Sri Lanka’s pleas was draining China’s political and social capital among Sri Lankans. It had eroded all the soft power China had in the island nation.

Instead of debt restructuring, China had offered a loan of $1 billion to repay the loans it had already taken out, plus $1.5 billion as credit for the purchase of goods in originating from China. When President Gotabaya Rajapaksa told visiting Chinese Foreign Minister Wang Yi in January this year that it would be a “great relief” if China restructured the repayment schedule, Wang did not commit. Instead, he said Sri Lanka should provide the necessary conditions for Chinese investment, make the port city of Colombo and the port of Hambantota “engines of Sri Lanka’s industrial growth” and resume talks for the rapid conclusion of a free trade agreement.

Recently, Ambassador Qi Zhenhong said that China will wait for the results of Lanka’s negotiations with the IMF, and went on to warn that China-Lanka bilateral relations will be shaped by the outcome of negotiations with the IMF. He could have said this in the context of the IMF’s possible disapproval of Chinese loans which the West says have pushed developing countries into a debt trap. The ambassador then reiterated Wang’s call for a swift move towards a China-Lankan FTA.

Lankan cabinet spokesman Nalaka Godahewa said China would only consider refinancing old loans, but would not restructure the repayment schedule. He also said that the West’s reaction to any agreement between Sri Lanka and China should also be taken into account by the Lankan government.

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

Views of China

However, literature on Chinese loans shows that China has restructured repayment schedules in African and Latin American cases.

After Wang’s visit in January, the Chinese Communist Party, led by world times quoted Song Wei of the China Academy of International Trade and Economic Cooperation as saying that only “interest-free loans” are eligible for debt relief and market loans are not. China has not provided interest-free loans to Sri Lanka.

However, Song added that China could “negotiate cooperation and equity rescheduling,” indicating that there is a window of opportunity for debt rescheduling of interest-bearing loans.

According to Sri Lankan diplomats, talks with China on rescheduling and related issues would begin after the current holiday there. Additionally, Lankan Prime Minister Mahinda Rajapaksa told his Chinese counterpart, Li Keqiang, that Sri Lanka will start working on resuming FTA talks which were suspended in 2018.

China lends to Sri Lanka at interest, although rates are generally low (at 2% according to economist Umesh Moramudali). There are no interest free loans. And grants have been rare. As a result, China will struggle to find ways to restructure its loans to Sri Lanka. But it compromised on its principles earlier in the case of some other countries, especially in Africa.

Aspects of Chinese Loans

According to Deborah Brautigam and Yinxuan Wang (Global Debt Relief Dashboard: Tracking China’s Debt Relief in the Age of COVID-19, 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: G20 Debt Service Suspension Initiative (DSSI); debt cancellation under the Forum on China-Africa Cooperation (FOCAC); one-time debt relief; and contributions to the IMF’s Disaster Relief and Containment Trust Fund.

Debt relief may involve renewal/refinancing whereby the outstanding balance of a loan is transferred to a new loan agreement; reprofiling/rescheduling (extension of the repayment period, but not reduction of the net present value of the debt – all DSSI treatments fall into this category); restructuring (change in terms resulting in a reduction in net present value) or debt forgiveness (reduction of principal, which may be partial or full).

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

According to the Jubilee Debt Campaign UK, China has suspended $5.7 billion in debt, which is more than half of the global total.

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

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

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

It is therefore likely that China will consider ways and means to help Sri Lanka cope with the unprecedented crisis it is going through. Ambassador Qi Zhenhong’s assurance to Lankan Finance Minister Ali Sabry is a harbinger of this.

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