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US urges China debt relief for Lanka following Beijing’s Zambia role
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US Treasury Secretary Janet Yellen addresses a media conference before attending the G20 Finance Ministers Meeting in Nusa Dua on the Indonesian resort island of Bali on July 14. AFP
By Kapila Bandara
The United States is nudging China, the largest bilateral creditor to Sri Lanka, to help restructure the Chinese debt of the bankrupt country now convulsing from social and political unrest.
Anger has boiled over into turmoil. Recklessly, the recalcitrant Sri Lanka Podu Jana Peramuna-led Government waited for a default to plead for debt restructuring. The economy and lives of Sri Lankans have been disembowelled.
The US Treasury Secretary, Janet Yellen, who is making her first visit to the Indo-Pacific region, said on Thursday, it would be in the interest of China and Sri Lanka to clear up the borrowings.
Dr Yellen spoke at a briefing in Indonesia where G20 finance officials have gathered. She responded to a question by a journalist on Sri Lanka’s debt. Some estimates put Sri Lanka’s debt to China at US$ 7.1 billion.
Dr Yellen is the former head of the US Federal Reserve.
“So, I don’t have anything specific on Sri Lanka, but China is, of course, a very important creditor of Sri Lanka. Sri Lanka is clearly unable to repay that debt. And it’s my hope that China will be willing to work with Sri Lanka to restructure the debt — it would likely be both in China and Sri Lanka’s interest,’’ Dr Yellen said.
“But more broadly, we’re really looking to China to step up their role in debt restructurings that are eligible for treatment under the Common Framework. We’ve not seen much progress and part of what I expect to do over the next several days is urge our partners in the G20 to put pressure on
China to be more cooperative in restructuring these unsustainable debts.’’
The Common Framework that Dr Yellen referred to, brings together the Paris Club and G20 official bilateral creditors and it weighs debt treatment on a case-by-case basis based on requests. The IMF and World Bank support negotiations. The framework is aimed at dealing with insolvency (the inability to repay debts) and protracted liquidity (access to financing including from financial markets) problems, along with reforms supported by the IMF.
IMF Managing Director Kristalina Georgieva has also encouraged China to move faster on debt relief for several countries, including Zambia.
How China deals with Zambia, which defaulted on about US$32b debt in 2020, will have implications for Sri Lanka.
Zambia requested help “under the Common Framework for debt treatment beyond the debt service suspension initiative’’. The debt service suspension initiative endorsed by the G20 and the Paris Club expired at end 2021. It temporarily halted debt servicing by the poorest countries.
China has now agreed to co-chair, along with France, the 16-nation creditor committee formed on June 16, to discuss Zambia’s debt. Reuters has reported that China held US$5.78b of Zambia’s debt at the end of 2021, based on government data.
In a statement on June 16, the G20 underlined that it is important for Zambia’s private creditors and other official bilateral creditors, “to provide debt treatments under the Common Framework on terms at least as favourable, in line with the comparability of treatment principle’’. This means that all creditors should be treated similarly, and that no creditor should benefit from a more favourable treatment than others. But, in reality, it is ambiguous and there is a clamour for more clarity in the definition of ‘comparability of treatment’.
Earlier this month, IMF’s Georgieva told Reuters that China would be the “first to lose dramatically”, if the existing debt problems morphed into a full-blown crisis.
Also, in a blog, she has argued that restructuring of Chad’s debt quickly can set a precedent for other countries.
The IMF is advocating more transparency on debt, arguing that without knowing what countries already owe and on what terms, creditors cannot make informed lending decisions. They will also be reluctant to participate in restructurings unless they know the terms given to other creditors. The IMF has declared that Sri Lanka’s debt is unsustainable and the government and the Central Bank of Sri Lanka, which painted the country into a corner, declared a default on April 12. Ratings agencies had predicted an economic meltdown, although then central banker, Mr Nivard Cabraal and the ousted Gotabaya Rajapaksa-led regime lived in blissful denial.
Mr Cabraal told Reuters in December 1, 2021, famously: “The repayments [for 2022] will go through seamlessly, we are confident we’ll be making those payments on time. There is absolutely no worry about that.’’ The accountant punted that 2022 economic growth would rebound to “above 5.5%’’.
The economy has collapsed and contracted. There is more pain on the horizon.
IMF researchers argue that restructurings after a default will bring, “the most severe and protracted declines in levels of GDP investment and private sector credit’’. They predict cumulative contractions of 6, 40, and 23 percentage points relative to the pre-restructuring linear trend over the first the years, respectively. “Moreover, banking crises are more likely to occur following post-default restructurings’’ they say.
Since issuing the first US$500 million international sovereign bond in October 2007, under the presidency of Mahinda Rajapaksa, Sri Lanka’s debt has ballooned above US$ 50b. Many of the issuances were at high interest rates and the bulk of the funds raised were pocketed by politicians and wasted in megalomaniac projects.
An IMF team, which visited from June 20 to 30, noted that because public debt is unsustainable, executive board approval would require adequate financing assurances from Sri Lanka’s creditors that debt sustainability will be restored.
| No debt crisis in Sri Lanka, Chinese scholars argue What debt crisis, ask some mainland Chinese scholars, referring to Sri Lanka’s implosion, while others cite various odd, unconnected issues. They steer clear of noting the high interest loans, the role in alleged corruption in unviable projects such as Hambantota Port, and debt relief. It is, of course, Beijing’s close friend, Mahinda Rajapaksa who first applied for a Chinese credit card. His successors including Ranil Wickremesinghe, now acting president, followed the lifestyle of living beyond means. Chinese companies have been accused in Parliament of ploughing millions into Mahinda Rajapaksa’s election campaigns. Jia Duqiang, an associate professor at the National Institute of International Strategy, Chinese Academy of Social Sciences, argues in the Chinese state media this week, that “in particular, the crisis can be attributed to the country’s fragile economic structure, the government’s flawed policies and its inability to deal with challenges, as well as adverse external factors’’. Prof Jia also says that “the industrial structure in Sri Lanka is not strong enough to withstand extreme external pressure, as the service sector accounted for 59.67% of GDP in 2020, while the industrial and agricultural sectors accounted for only 26.25 and 8.36%. So after the pandemic dealt a serious blow to the tourism sector and the export of cash crops suddenly declined due the Russia-Ukraine conflict, the country’s foreign exchange reserves started declining rapidly’’. Prof Jia says “a major reason behind the debt crisis is the government’s radical fiscal policy’’. He also says China, “sincerely hopes Sri Lanka will overcome the difficulties and restore stability soon, and will do what it can to help Sri Lanka to get through the crisis’’, and notes that “as a friend in need, China has promised to supply 10,000 tons of rice to Sri Lanka which can feed 1.1 million students in 7,900 schools for up to half a year. In fact, Sri Lanka received 1,000 tons of rice and some medical supplies on June 8’’. In January, Fu Xiaoqiang, vice-president of the China Institutes of Contemporary International Relations, in an opinion targeting the West, said boldly that Sri Lanka is “not facing a debt crisis’’ despite “a relatively high debt’’. Some media outlets “have been hyping up the debt crisis’’. Sri Lanka is “facing a shortage of foreign exchange, not a debt crisis’’ he opined. China has been helping Sri Lanka to boost its economic and social development, and will continue to do so, he says. He says, “Western economies, not China and its Belt and Road Initiative, are the main creditors of Sri Lanka, as 54% of the country’s external loans came from the international capital market. Sri Lanka’s debt to China, about US$3.38 billion in loans, accounts for about 10% of the country’s total foreign debt in US dollars. China is Sri Lanka’s fourth-largest creditor, after international financial institutions, the Asian Development Bank and Japan’’. | |
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