Why China cannot write off Sri Lanka’s debt despite leniency by IMF

A group of Buddhist monks from Sri Lanka offering prayers at the Bodh Gaya pilgrim centre in India called for Tibetan spiritual leader Dalai Lama to visit their country as it would boost religious tourism and thus help address the nation’s economic crisis. At what looks like a relatively pragmatic level, leading economists from the world over have urged international creditors to write off the island nation’s $51 billion debt, which Sri Lanka consciously defaulted last year, and thus help Sri Lanka start off on a clean slate. However, in the given circumstances, the feasibility of the former seems relatively brighter than that of the latter. It is high winter in north India, and “I believe, like His Holiness has been to Bodh Gaya, if he goes to Sri Lanka, many thousands of tourists will come to Sri Lanka which will boost the economy because we are in a crisis situation. And, if His Holiness goes to Sri Lanka, many tourists will come here similar to Bodh Gaya. We will be blessed and the economy will also be boosted”, The Island newspaper in Colombo quoted an ANI report, which in turn cited the Most Venerable Waskaduwe Mahindawansa Mahanayake Thera, Mahanayake Thera, Sri Sambuddha Sasanodaya Sangha Sabha, Sri Lanka. Tourism is among the mainstay of the Sri Lankan economy. The current economic crisis began with a downslide in overseas arrivals after the 2019 ‘Easter Sunday serial blasts’, in which 38 foreigners were among the 290 dead. This was followed by the global Covid lockdown, which hit small tourism-based economies like Sri Lanka and neighbouring Maldives, Mauritius and Seychelles relatively worse than larger economies with multiple sectors of economic productivity and activity. As in most other cases, Sri Lanka’s crisis was caused primarily by economic mismanagement since its Independence in 1948, topped by some unthinking policies of the Covid-era of then president, Gotabaya Rajapaksa. The Easter blasts just before his time, and Covid lockdown under his care only fast-tracked the nation’s agony. Holding the baby at wrong time in contemporary history, and committing worse follies with immediate consequences than his predecessors, Gota ended up losing his job and caused the exit of his ministerial brothers and nephews and that of their party, the Sri Lanka Poduja Peramuna (SLPP). China dragging the feet It is in this background that close to 200 international economists, including some from Sri Lanka, have issued a joint statement, calling upon Sri Lanka’s creditors, both nations and private parties, to write off what the nation owed them. This was after China, which is the single largest investor-creditor nations, seemed to be dragging its feet even for rescheduling the nation’s loan, for the IMF to clear a $2.9 billion loan that has been hanging balance for months now. Against this, some international private creditors have been pressing Sri Lanka to return the debts due to them. The US-based Hamilton Reserve Bank Ltd, which holds more than $250 million of Sri Lanka’s 5.875 per cent international sovereign bonds that was due in July 2022, promptly moved a New York federal court, seeking full payment of principal and interest. The bank’s holding represents more than 25 per cent of the aggregate amount of the bonds, which, per the indenture, would likely enable it to block an undesired modification to the notes. In this background, the economists have said how “all lenders – bilateral, multilateral, and private — must share the burden of restructuring” Sri Lanka’s finances with assurance of additional financing in the near term. “However, Sri Lanka on its own cannot ensure this. It requires much greater international support. Instead of geopolitical manoeuvring, all of Sri Lanka’s creditors must ensure debt cancellation sufficient to provide a way out of the current crisis.” Blaming ‘global forces’ for food and energy imports costs to soar and interest rates to rise for small nations like Sri Lanka, the statement however also said that a “history of policy mismanagement – and specifically the de-regulation and openness that encouraged irresponsible borrowing, enabled illicit financial flows out of the country and assisted political corruption” as the cause for intensifying external debt and balance of payments crises. As the economists explained, “Over the last decade of liquidity expansion and low interest rates in the world economy, private lenders provided loans to low and middle-income countries, at higher interest rates than for advanced countries. These higher rates were purportedly due to greater risk-exposure that could make debt repayment more difficult in such countries.” The reference is to private bond-holders like Hamilton Reserve that has already moved the court, demanding full repayment. According to them that “risk has now materialised, firstly through a global pandemic, and then the price shocks and interest rate increases of 2022”. This aspect is true only up to a point, at least in the case of Sri Lanka, as the nation had begun borrowing from international institutions and also private lenders and third nations even earlier. Yet, as the scholars pointed out, “Private creditors own almost 40 per cent of Sri Lanka’s external debt stock, mostly in the form of International Sovereign Bonds (ISBs), but higher interest rates mean that they receive over 50 per cent of external debt payments. Such lenders charged a premium to lend to Sri Lanka to cover their risks, which accrued them massive profits and contributed to Sri Lanka’s first ever default in April 2022,” the statement said, seeking to underline that it was for the first-time that the nation had defaulted on repayment of loans. Unrealistic assumptions As a consequence, lenders who benefited from higher returns because of the “risk premium” must be willing to take the consequences of that risk. ISBs are now trading at significantly lower prices in the secondary market. In this context, giving private bondholders an upper hand relative to sovereign debtors in the Paris Club and the IMF’s required debt negotiations violates the basic principles of natural justice, the statement said. In this context, the economists, who seem to be centre-left and pro-poor, said that the recent Budget of the Sri Lankan government has “unrealistic revenue assumptions that are unlikely to be met”. Revenue shortfalls would then necessitate further “austerity” and likely cuts in essential public spending. The Budget also proposes public asset stripping and privatisation of strategic lands, marine resources, energy, transport and telecom infrastructure and public enterprises. These policies will harm the most vulnerable groups in Sri Lanka, exacerbate poverty and inequality, and lead to further economic decline” Instead, they said, the “focus should be on legal and regulatory changes to stem the illicit outflow of capital through transfer pricing and trade mis-invoicing over the past 15 years, which is estimated to be far more than the aggregate foreign debt of Sri Lanka, and on taxation of wealth and consumption of the super-rich”. At the end of the day, the economic experts have put forth what reads like a moralistic argument for the private international creditors and bondholders of the kind. It may not produce results as the private lenders of the kind are in the business of lending-business, and not charity. They are either private banks or mutual funds, often with a large share-holding pattern, with the result, the money that they lent is aimed to show up profits and dividends for the self and the investors. In most cases, no single man can take a decision to write off the loan, not only in the case of Sri Lanka but also that of such other nations and entities. Why China too can’t do it At the bilateral level, China is Sri Lanka’s largest creditor and, with India and Japan, part of official creditor talks to restructure the country’s debt. Of these three major creditor nations, China accounted for nearly a fifth of the nation’s external debt, or $7.4 billion, by the end of the previous fiscal, according to some studies. This was above the “often-quoted 10-15 per cent figures”, the study said, adding a “significant portion” of the country’s debt to China had been recorded under lending to state-owned enterprises rather than central government. The reasons are not far to seek. Sri Lanka is not the only nation or one major creditor whose debts China can be expected to write off. China floated the Belt and Road Initiative (BRI) in 2013 only to make massive investments in development projects in third nations, expecting huge returns on the surplus money in its hands and also to expand its political base vis a vis the US in the global arena. Nothing much original to it. It was the same way, the US had expanded its political support in the decades after the Second World War, against the expansionist Soviet Union. Only the US needed only to print dollars after it was declared the international currency, but China also earned every cent in its surplus. That makes it that much more difficult for China to think of losing it, especially when it is not going to be the only instance if it blinked once. According to reports, China’s investments in 147 member countries of the BRI since the launch of the BRI since launch in 2013 stood at $932 billion in 2022, with $561 billion in construction contracts and the rest under other heads. By focusing on construction contracts, China also ensured that its infrastructure industry like cement and steel were kept busy and were making money, and its labour force was gainfully employed overseas. This way, China’s State-owned firms could keep the overheads and profit margins for outside suppliers and labour contractors, near-nil, and also ensure ‘quality control’ (!) in its own way. Long queue of debtors From a purely Chinese perspective, once they write off the loans for one country, there will be a long queue of most of the other debtor nations. Most of these nations have had Beijing’s ‘white elephant’ projects. Coupled with the global economic downturn in the face of Covid lockdowns and the Ukraine War, they face a debt crisis of unprecedented proportions. Pakistan is another example in the immediate neighbourhood. But Sri Lanka is not Pakistan, nor in Sri Lanka, another Pakistan, from China’s geo-political and geo-strategic perspective, where Beijing has seemingly stopped looking at historic adversity. Instead, owing to India’s participation in the US-initiated Quad and Indo-Pacific, China now perceives India as an ally of the US in these parts, more and more. Hence, Pakistan’s use of China has increased in depth and width in strategic matters, both in the regional and global contexts. Even without it all, Pakistan is possibly the only politico-military ally of China in ways no other nation is, whether a BRI member or not. Yes, of course, in recent months, owing to the China-added external debt and consequent economic crisis, Islamabad is tilting towards the US and the rest of the West, but the Islamabad-Rawalpindi politico-military combo ruling Pakistan has not given up on Beijing. It may never ever do so, as they too know China, from a Pakistani perspective is more dependable as a politico-military ally than the US, as the UNSC veto-vote for labelling Pakistan-harboured anti-India terrorists has shown time and again. China has only extended more credit to Pakistan at the height of the current crisis but has not written off any of the past loans. Islamabad also knows Beijing well enough to moot such a course, a huge concession. Suffice is thus to point out that what does not apply to Pakistan cannot hold for Sri Lanka, as Hambantota, half-finished Colombo Porty City and unoccupied Lotus Towers in the capital Colombo either investments or logistic support. They are not a strategic asset like Gwadar Port or all the other infrastructure and political support that Pakistan gives back in an equal measure! The writer is a Chennai-based policy analyst and political commentator. Views expressed are personal. Read all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.