Deepening debt crisis in SL strokes crisis over Chinese lending

News: Sri Lanka struggling financially to pay for its imports. This raised questions about Chinese lending to the South Asian nations as part of its Belt and Road initiative programme.

Why Sri Lanka is struggling financially?

Sri Lanka’s key foreign exchange earners, tourists and remittances from abroad were hit hard by the pandemic. So, it declared an economic emergency in the state because of decade-high inflation, weak currency and high imports.

According to Fitch, currency foreign reserves were depleted to $1.6bn, enough to cover less than a month of imports. Also, Rating firms like Moody, Fitch and standard have also downgraded the country’s sovereign credit score into the junk category. It does not have sufficient reserves to import essential products like fuel, medicine etc.

Why Sri Lanka is blaming China for its economic crisis?

According to Sri Lankan Central bank data, as of the end of 2020, Sri Lanka has about $3.5bn in debt from China excluding loans from state enterprises. In which, about 36% of its debt is owed through international sovereign bonds. Sri Lankan government was also unable to repay the loan for the Hambantota Port which was built by Chin and so gave it on a 99-year lease to it.

Sri Lanka accused China to push it into a debt trap to expand China’s sphere of political influence and use Sri Lanka to achieve the ambition of becoming the world power at the cost of the lives of innocent people. It requested China to restructure its debt, provide concessional trade terms and lift Covid related restrictions on Chinese tourists visiting Sri Lanka

What is China response to the crisis in Sri Lanka?

How India can make use of the opportunity in its favour?

The crisis has opened opportunities which India cashed in by providing $500 mn. It was the first major tranche of $4.5 bn of sovereign debt repayments in 2022. Both countries are also in talks of Indian loans totalling $1.5 bn for essential commodities, fuel, food and medicine.

Source: This post is based on the article “Deepening debt crisis in SL strokes crisis over Chinese lending” published in the Livemint on 19th January 2022.