Sri Lanka looking beyond crisis, seeking to boost its foreign exchange reserves
IMF, World Bank and Asian Development Bank are set to help the South Asian country to boost its forex reserves by US$ 8.4 billion. This will reassure its main creditors, including China and India. But it is as a result of Chinese investments that the island nation is in its current predicament.
Colombo (AsiaNews) – The Sri Lankan government is ready to increase the country’s foreign exchange (forex) reserves by about US$ 8.4 billion thanks to an International Monetary Fund (IMF) bailout set to kick in this month.
The government’s ambitious plan depends on US$ 2.7 billion from the IMF, as well as financial support from the World Bank, aid from the Asian Development Bank, and the restructuring of some state-owned enterprises.
According to experts, the foreign exchange reserve will begin to strengthen with the first tranches expected within the next two weeks.
A senior official at the Central Bank of Sri Lanka told AsiaNews that Sri Lanka received assurances from all “major” creditors, including China and India, thus laying the foundations "for the final approval" of the IMF package.
In a statement, the latter noted that, next Monday, its board will consider the agreement reached on 1 September 2022.
On 7 March, President Ranil Wickremesinghe told parliament that there are "signs" that the economy is "improving" even though the foreign exchange reserves are still "insufficient" for “imports” of “essential” goods.
The IMF plan is crucial before other creditors can start releasing additional funds.
The country earns around US$ 12 billion from exports, US$ 7 billion in remittances from Sri Lankans abroad, and another US$ 4 billion from tourism, for a total of about US$ 23 billion, this according to economic analysts Dilan Senanayake and Sujith Gamage. Imports are in the vicinity of US$ 22 billion.
For the latter, “The balance could be utilised [. . .] to manage the daily cash flow, followed by the rapid recovery of the economy.”
Sri Lanka has long benefited from economic growth thanks to long-term loans, especially from China, which remains a major creditor. However, China’s model of economic development in the island – with large projects by few companies at a higher interest rate and confidentiality agreements on these investments – has proven problematic.
Political analysts Chaminda Bandara and Randesh Wijewardena note that Sri Lanka is facing the "worst" economic crisis since independence, with "shortages" of food and fuel, "yet China has turned a blind eye to the crisis" shifting the blame onto the borrower.
One example is the Hambantota port project developed with significant Chinese funding, which has struggled to be viable and represents a geostrategic threat to the Indian Ocean region.
Sri Lanka also is on the hook for several other similar projects with huge debts to pay.
Lastly, China’s presence has favoured the spread of corruption and endemic borrowing, making the island hostage to Beijing's investments that have worsened "the structural weaknesses of the economy and contributed to the current crisis.”