Sri Lanka seeks restructuring of Chinese loans amid financial crisis

 Sri Lanka is going through severe economic crisis and seeking bail out from China to improve the financial situation 

The Sri Lankan president and PM have requested the Chinese government to restructure the loans that due in 2022.  Rajapaksa brothers are desperately looking for a bail out from China to control the high inflation and depleting foreign reserves.

The Sri Lankan government is also seeking access to preferential credit for imports of essential goods from China. Sri Lanka is going through a severe economic crisis and wants some breathing space to manage its fast depleting foreign reserves.

President Gotabaya Rajapaksa told visiting Chinese Foreign Minister Wang Yi that it would be “a great relief to the country if attention could be paid on restructuring the debt repayments as a solution to the economic crisis that has arisen in the face of the COVID-19 pandemic,” according to a statement from his office.

Rajapaksa asked Wang for a concessionary credit facility for imports so that industries can run without disruption, the statement said. He also requested assistance to enable Chinese tourists to travel to Sri Lanka within a secure bubble.

China considers Sri Lanka to be a critical link in its Belt and Road global infrastructure initiative. Relations were recently strained over a shipment of Chinese fertilizer that allegedly contained harmful bacteria, and business agreements that were signed with China’s rivals, the United States and India.

Sri Lanka has benefited from billions of dollars in soft loans from China but the island nation is currently in the midst of a foreign exchange crisis placing it on the verge of default, according to analysts. China hasn’t issued public statement so far regarding the Sri Lankan request.

Sri Lanka’s government declared an economic emergency last week amid rising food prices, a depreciating currency, and rapidly depleting forex reserves. President Gotabaya Rajapaksa has called in the army to manage the crisis by rationing the supply of various essential goods.

The tourism industry, which represents over 10% of the country’s Gross Domestic Product (GDP) and brings in foreign exchange, has been hit hard by the coronavirus pandemic. As a result, forex reserves have dropped from over $7.5 billion in 2019 to around $1.6 billion in December 2021.

With the supply of foreign exchange drying up, the amount of money that Sri Lankans have had to shell out to purchase the foreign exchange necessary to import goods has risen. So the value of the Sri Lankan rupee has depreciated by around 12% in 2021. It has to be noted that the country depends heavily on imports to meet even its basic food supplies. So the price of food items has risen in tandem with the depreciating rupee.

The government’s ban on the use of chemical fertilisers in farming has further aggravated the crisis by dampening agricultural production. Earlier this year, Mr. Rajapaksa made public his plan to make Sri Lanka the first country in the world with an agriculture sector that is 100% organic.

The Sri Lankan government has blamed speculators for causing the rise in food prices by hoarding essential supplies and has declared an economic emergency under the Public Security Ordinance. The army has been tasked with the duty of seizing food supplies from traders and supplying them to consumers at fair prices.

                                          

 It has also been given the powers to ensure that forex reserves are used only for the purchase of essential goods. The government has refused to end its aggressive push for complete organic farming claiming that the short-term pain of going organic will be compensated by its long-term benefits. It has also promised to supply farmers with organic fertilisers as an alternative. Further, Sri Lanka’s central bank earlier this year prohibited traders from exchanging more than 200 Sri Lankan rupees for an American dollar and stopped traders from entering into forward currency contracts.

Sri Lanka's COVID-stricken economy is being likened to a ticking time bomb that could go off at any moment as foreign reserves plummet, the cost of living rises and the central bank carries on printing money.

The Central Bank of Sri Lanka printed over 130 billion rupees ($640 million) in October alone, but that is just the iceberg's tip. From December 2019 to August 2021, Sri Lanka's money supply increased by 2.8 trillion rupees -- a massive 42%.

Since growth in 2020 was -3.6% and is expected to be around 4.5% in 2021, real net growth for the two years will be "about 1%.

 In mid-October, Colombo lifted price controls on essential food items, including household gas. That saw the price of a 12.5 kilogram cylinder of cooking gas jump from 1,400 rupees to 2,675 rupees in the space of a week. A 400 gram pack of milk powder, a staple in almost every Sri Lankan home, increased to 480 rupees from 380 rupees, and wheat flour went up by 10 rupees a kilo causing a domino effect in bread and other flour-based products.

Last week, the Lanka Indian Oil Company, which competes with the state-run fuel distributor Ceylon Petroleum Corporation (CPC), announced a 5-rupee increase per liter of fuel with effect from Oct. 21. CPC has since been seeking approval to increase fuel prices after suffering a loss of 70 billion rupees this year up to August.

Sri Lanka's inflation rate has increased this year from around 4% to about 7%, but fell back slightly in September. The September food index was meanwhile up 22% compared to two years earlier.

In 2019, soon after President Gotabaya Rajapaksa was elected president, sweeping tax cuts were announced to make good on an election pledge. The bonanza included cutting value-added tax to 8% from 15%, and abolishing the 2% nation-building tax on domestic goods and services.

The financial crisis was brought on soon after President Rajapaksa did away with taxes, and following their removal government revenue fell by nearly 30% in 2020. The government created the financial crisis itself, but certainly the pandemic made it more complicated, resulting in total mismanagement of the economy.

In 2020, government revenue in Sri Lanka amounted to approximately 9.6% of the nation's gross domestic product, down from 12.6% in 2019 ahead of the tax cuts.

Sri Lanka faces one of its worst economic crises, with foreign reserves down to around $1.6 billion, barely enough for a few weeks of imports. It also has foreign debt obligations exceeding $7 billion in 2022, including repayment of bonds worth $500 million in January and $1 billion in July.

The situation has left households grappling with severe shortages. People wait in long lines to buy essential goods like milk powder, cooking gas and kerosene. Prices have increased sharply, and the Central Bank says the inflation rate rose to 12.1% by the end of December from 9.9% in November. Food inflation increased to over 22% in the same period.

Because of a currency shortage, importers are unable to clear their cargo containing essentials and manufactures are not able to buy raw materials from overseas.

                                                                         Khalid Bhatti