01/13/2022, 18.20
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Rajapaksa asks Beijing for help to restructure its debt while India keeps a watchful eye

by Arundathie Abeysinghe

Indebted and grappling with a severe financial crisis, Colombo tries to balance the interests of Beijing, Delhi and Washington. Affected by the pandemic, the island nation needs foreign currency to pay for its growing imports. China’s “debt trap” is an issue. Sri Lanka reaches oil deals with India.

Colombo (AsiaNews) – Sri Lankan President Gotabaya Rajapaksa has asked China for help to restructure his country’s high debt with Chinese lenders.

Mr Rajapaksa presented the request, which is part of his government's efforts to overcome the current financial crisis, during a meeting with Chinese Foreign Minister Wang Yi.

Wang arrived in Sri Lanka on Monday on a two-day official visit, accompanied by a delegation of 18 officials, to mark the 65th anniversary of diplomatic ties between the two countries, and the 70th anniversary of the signing of the Sri Lanka-China Rubber Rice Pact.

Wang's last visit to South Asian Nation was in January 2020, after President Rajapaksa assumed office amid concerns over Sri Lanka’s outstanding debt to Beijing. Sri Lanka got into debt over several infrastructure projects, including the strategic Hambantota port.

China acquired a 99-year lease as a debt swap, sparking global anxiety over China's investment model and its Belt and Road Initiative (BRI).

Sri Lanka is currently facing a crippling economic crisis due to its high debt and a dollar shortage.

As it grapples with the COVID-19 pandemic, it is seeking funds to rebuild its foreign exchange reserves, and pay ballooning import bills. The situation is aggravated by losses in the tourist sector, one of the country’s main sources of hard currency.

Sri Lankan leaders have tried to balance ties with big powers (China, India United States) to obtain the necessary funds for the country’s own financial needs.

During the past several years, it has benefited from billions of dollars in soft loans from China, its fourth largest lender. For example, China has lent Sri Lanka over US$ 5 billion for the Hambantota port and the Mattala International Airport, flagship projects under China’s Belt and Road Initiative, as well as funds for highways and a coal power plant.

However, critics are of the view that the funds have been used for “white elephants projects” with low returns, something China has denied.

In addition to debt restructuring, President Rajapaksa wants China to provide “concessional terms” for its exports to Sri Lanka, about US$ 3.5 billion in 2020.

According to official sources, the Sri Lankan leader also proposed allowing Chinese tourists to visit Sri Lanka, if they adhere to strict coronavirus regulations, including staying at pre-approved hotels and visiting certain tourist attractions. Before the health emergency, the Chinese were Sri Lanka’s main source of tourists.

As pointed out by analysts, the country is a key part of China’s BRI, a long-term plan to finance as well as build infrastructure linking China to the rest of the world. Yet, several countries, including the United States, have labelled the BRI a “debt trap” for smaller nations, including Sri Lanka.

This year alone, the South Asian nation has to repay approximately US$ 4.5 billion of debt, starting with a US$ 500 million International Sovereign Bond (ISB) maturing on 18 January.

In late December, the island nation tapped a US$ 1.5 billion currency swap with China to boost its reserves to US$ 3.1 billion. However, Wang’s visit comes at a time when relations between the two countries are under stress.

Contaminated organic fertiliser provided to Sri Lanka by a Chinese company is the bone of contention after the latter launched international arbitration against Sri Lanka in Singapore, a rare legal action against Beijing's close ally.

Some political analysts see the visit by the Chinese minister as a way to keep a balance with US and Indian influence in the Indo-Pacific. Thus, Wang presented several investment proposals, including a US$ 1.4 billion Colombo Port City project.

As China tries to stabilise its influence in Sri Lanka, acquired through massive investments for over a decade, this is raising concerns in New Delhi.

India is sceptical of China’s involvement in the South Asian nation, seeing it as a “land grab” through the acquisition of Sri Lankan assets, posing a threat to the peace and stability of the entire South Asian region.

In early 2021, India lodged a “strong protest” with Sri Lanka on a tender awarded to a Chinese company for the construction of renewable energy plants in Delft, Nagadeepa and Analthivu Islands, off the coast of Jaffna, in close proximity to the Indian state of Tamil Nadu.

On 6 January, Colombo signed an agreement with the local unit of the Indian Oil Corporation, Lanka IOC, to lease 75 oil tanks in exchange for securing a US$ 500 million fuel credit line from India, amidst efforts to look for innovative ways to bring in foreign exchange.

Previously, Sri Lanka had agreed to lease all of its 99 tank oil farms to India in 2003.

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