China lets down Colombo in securing $2.9 billion IMF loan – Read Full Details!

Sri Lanka is in for serious political trouble as it won’t be able to get the IMF loan December for its principal ally and debtor China. The 20th party congress was attended by China and the Island nation is yet to start a dialogue about debt restructuring.

Washington-based financial analysts believe Sri Lanka will miss December’s deadline. They will then have to wait until March 2023 in order to obtain a USD 2.89 billion loan from the IMF in eight equal tranches. Due to deep recession, currency depreciation, and an escalating fiscal deficit, Sri Lanka’s debt has risen even more. The real value of domestic bonds has been significantly diminished by inflation since the year 2021.

Japan and India, both debtors, have already begun a dialogue on debt reconciliation and restructuring with Colombo. China however is yet to engage in this dialogue because Beijing was part of the 20th National Party Congress and has little time for Sri Lankan client states. At the close of 2021, Sri Lanka’s total debt was USD 36 million. Sri Lanka owes China USD 7.1 billion or 20% of its total debt. The public total debt, which stood at 115.3 percent of the GDP as of December 20,21, had risen to 143.7% of the GDP as of June 2022. This has seen the bilateral debt rise from 12.7 per cent of the GDP up to 20.4 per cent of the GDP. Ranil Wickremesinghe of Sri Lanka stated, “Now, this process, we had have to move.” We can achieve a significant advantage by moving quickly and reaching an agreement by December. That would be mid-November. It is not possible, however, because the party conference in China has now been overshadowed by the IMF Board. But we should aim to have it by January.”

This political juggling by Wickremesinghe, a lone member of his party but a close ally the discredited Rajapaksa system, is due to the fact that Sri Lanka needs a bridge funding fund of USD 850m to survive the IMF board meeting in March. Or else, there will be public demonstrations just like in the July-August protests. Ultra-leftist parties will gain political traction since the Sri Lankan opposition lacks the strength to defend itself. Who will fund the USD850 million bridge funding necessary to ensure Colombo’s survival until March 2023?

The economic crisis that Sri Lanka has been experiencing is due to poor fiscal management, corruption, and mismanagement by the Rajapaksa government. After taking a loan apparently at 11 percent interest from Beijing, they secured a Norochcholia Power Station of 900 megawatts with Chinese aid. The White Elephant Projects of Sri Lanka, which were undertaken with Chinese assistance, have plunged the Island nation deeper into an economic crisis with no sign of recovery in at least five years.

China is yet to sign on to the debt restructuring plan. India has already held two rounds of talks and is currently in talks with Japan. Colombo is in debt to India of nearly USD 1.7 Billion. India also owes Colombo USD 4 billion in emergency aid. Modi’s government has done everything possible to keep the island nation afloat. This is despite the fact that Sri Lanka continues to play around with India’s enemies, Pakistan and China in the Indian Ocean. Sri Lanka may be waiting for China, which has a zero-covid policy, to allow Han Chinese tourists to visit the Island nation and help it recover its economy. The political, economic and social future of Sri Lanka looks very grim.

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