Beijing's passive approach has encouraged the policy banks to make decisions based on its economic interests thus slowing down Sri Lanka’s debt restructuring process
China’s decision has increased the complexities of Sri Lanka’s debt restructuring before its first International Monetary Fund (IMF) review in September—as failing to debt restructure might lead to the suspension of the current assistance programme.First, the government plays a crucial role in determining the nature of assistance given to proposed projects. Broadly, the Chinese government offers two types of support: Overseas development assistance (aid, concessional loans and interest-free loans) and official assistance (loans with interest at market rates or higher than market rates). The Chinese Ministry of Finance and Ministry of Foreign Affairs often take a call on the nature of the assistance given after reviewing the proposals submitted to the Chinese missions by the recipient countries. This decision is shaped by the government’s political and economic interests. The policy banks then decide the fate of these projects. These banks are tasked to generate financial returns and profits, and, as a result, they often decide to fund projects at market rates. Practically speaking, banks can refuse to finance projects if deemed unviable, but since they are managed by top Communist Party of China (CPC) cadres, the government's initiatives and interests frequently take precedence. The prospect of the Belt and Road Initiative (BRI) countries getting easily financed with some leniency on conditionalities further substantiates this argument. And, in cases where the government decides to fund projects on concessional loans, the banks ask the former to cover the gap between commercial and concessional loan rates.
The government plays a crucial role in determining the nature of assistance given to proposed projects.The policy banks then lend the finances to profit-seeking Chinese State-Owned Enterprises (SOEs) that are often in search of contracts in other countries. The SOEs are thus expected to implement the project in the recipient country. These SOEs are also managed by the CPC cadres and entrusted to promote Chinese economic interests, such as generating revenues; expanding the role, share, and function of Chinese SOEs; promoting Chinese production and supply chains; and increasing forex reserves.
The Chinese government’s interest in Sri Lanka paved the way for more investments in the island nation.On the other hand, CDB has lent around US$3.0 billion to Sri Lanka. The bank began investing in Sri Lanka only in 2011, but its funds were limited in scope and extent. In Sri Lanka, CDB focuses on refinancing loans, rather than project-specific funding, majorly acting as a balance of payment supporter. In 2018, CDB offered Sri Lanka a funding facility of US$1 billion. Similar facilities of US$500 million and US$700 million were issued in 2020 and 2021.
In March 2023, China became the last country to assure the IMF of debt restructuring, albeit hesitantly and half-heartedly.It appears that restructuring efforts have been half-hearted due to a lack of political will in China. To be clear, China has not been lenient on debt restructuring. It had rejected similar requests from Sri Lanka in 2014 and 2017 but had often refinanced or offered new loans. However, these alternatives are absent this time, even when a crisis-hit Pakistan continued receiving fresh loans. This passivity for Sri Lanka is due to a series of differences between Beijing and Colombo since late-2021, such as a tussle over the fertiliser issue, the cancellation of a Chinese solar project in Northern Sri Lanka, Sri Lanka’s approaching of the IMF, and the unilateral cancellation of debt repayments. As a result, there is a possibility is that Beijing has become passive and left the profit-seeking SOEs and policy banks to chart the way ahead in Sri Lanka, even as new Chinese investments continue to flow in. The second possibility is that the Chinese government is restructuring loans where it expects minimal economic and political costs. It has partially restructured ChEXIM loans that are both concessional and commercial while leaving all of CDB’s (commercial) loans untouched. This strategy will also deter China from setting a precedent to other countries that are seeking debt-restructuring talks with Beijing. Overall, Chinese policy banks have played a significant role in furthering Chinese interests in Sri Lanka. In practice, they tend to enjoy some autonomy in lending and decision-making, but they have often lined up with the government for political or economic reasons. However, in the case of Sri Lanka’s debt restructuring, Beijing's passive approach has encouraged the policy banks to make decisions based on its economic interests. Thus, contributing to a slow process of restructuring, and also indicating the crucial role of the Chinese government in restructuring Sri Lanka’s debts.
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Aditya Gowdara Shivamurthy is an Associate Fellow with ORFs Strategic Studies Programme. He focuses on broader strategic and security related-developments throughout the South Asian region ...Read More +