China hesitates over the IMF’s debt plan for Sri Lanka, leaving Colombo in limbo

With China still refusing to support Sri Lanka’s debt restructuring based on the IMF and Paris Club’s debt sustainability analysis (DSA), time is running out for Colombo to secure a much-needed loan to help the country recover from its current economic crisis. Sri Lanka is seeking a USD 2.9 billion loan from the IMF to be paid back in eight installments over four years.

While India has agreed to support the island nation through DSA, China and the IMF’s Executive Board are still at odds over the length of the loan moratorium and debt restructuring. Under these conditions, the IMF can either make a loan on arrears and then wait for China to join the IMF by the spring meeting or later this year. Sri Lanka owes China nearly USD 7.8 billion, which includes bilateral lending from the EXIM Bank as well as commercial lending from the Chinese Development Bank. Over the years, the Rajapaksas, in collusion with current President Ranil Wickremesinghe, used these loans to fund white elephant projects such as Hambantota port, Mattala airport, Norocholai power plant, and Colombo port city in exchange for long-term tax breaks and complete control of the island nation.

While China has been the preferred destination of Sri Lanka’s political leadership since the new millennium, Colombo chose to avoid India under pressure from Beijing and has yet to accept India’s proposal to develop the Trincomalee port. Another issue is that India gave Sri Lanka $4 billion in aid last year, including food, gasoline, and medicine, to help it overcome its crippling economic crisis.

With the Chinese EXIM bank only willing to extend a two-year debt moratorium to Colombo for the time being, the Sri Lankan economy will hit rock bottom soon, or else the IMF will have to lend on arrears with even stricter conditions. This not only means more political instability in the island nation, and the obvious beneficiaries of this ferment will be Sri Lanka’s Communist parties, such as the JVP.

The political climate in Sri Lanka will remain uncertain, but the local elections next month will provide the first indication of the extent of the upheaval. President Wickremesinghe, the lone MP from his party, may be hesitant to call general elections unless the mainstream parties recover from the blow. With the US dollar at an all-time high against the Sri Lankan rupee and food inflation in the double digits, things will get much worse for Sri Lanka before improving. And it may take at least a decade.