In December, China failed to get a $2.9 billion IMF loan for Colombo.

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In December, China failed to get a $2.9 billion IMF loan for Colombo.

As the primary bilateral debtor, Sri Lanka will miss the December deadline for obtaining an IMF loan. With the 20th Party Congress going on, China had limited time for talks with Colombo about debt restructuring. The IMF Executive Board will meet again in March 2023.

Major political upheaval is on the horizon for Sri Lanka as it will be unable to obtain the crucial IMF loan in December since China, the island nation’s primary ally and debtor, participated in the 20th Party Congress and has yet to open negotiations on debt restructuring.

Financial analysts in Washington predict that Sri Lanka will miss the IMF deadline in December and would instead have to wait until March 2023 to receive a loan from the lending organisation in eight equal instalments totaling USD 2.9 billion. In the meanwhile, the Sri Lankan debt has grown further as a result of currency devaluation, a severe economic downturn, and a ballooning fiscal deficit. Inflation has significantly reduced the real worth of domestic debt since the end of 2021.

While debtors Japan and India have already started a conversation with Colombo about debt reconciliation, China has yet to join the conversation because Beijing was preoccupied with the 20th National Party Congress and had little time for client state Sri Lanka. At the end of 2021, the island nation owed a total of USD 36 billion. Of this, Sri Lanka owes China USD 7.1 billion, or 20% of its total debt. The entire public debt has increased from 115.3 percent of GDP at the end of December 2021 to 143.7 percent of GDP by the end of June 2022. Out of this, the bilateral debt has increased from 12.7% of GDP to 20.4% of GDP. Ranil Wickremesinghe, the president of Sri Lanka, was quoted as saying on October 31, 2022, “Now, this is the process, we had to move. We will significantly benefit if we can go forward and reach an agreement by December, which would entail doing so by mid-November and approaching the IMF Board by mid-December. I’m not sure whether we can, though, only because the party conference in China has shifted the country’s attention there. But we must try to finish it by January.

Sri Lanka will need a bridge gap finance of USD 850 million to live until the next IMF board meeting in March, which is the reason behind Wickremesinghe’s political juggling. Wickremesinghe is the only MP of his party and a close friend of the deposed Rajapaksa dictatorship. The ultra-leftist parties will acquire electoral traction if there are no public protests, as there were in July and August of the previous year, because the Sri Lankan opposition lacks the strength to stand up on its own. Who will provide the USD 850 million temporary money to ensure Colombo’s survival through March 2023 is the question.

The Rajapaksa administration, which obtained a 900-megawatt Norochcholia Power Station with Chinese assistance after taking out a loan from Beijing at what appears to be an interest rate of 11%, is to blame for Sri Lanka’s economic crisis due to its mismanagement, lack of fiscal restraint, and corruption. Sri Lanka’s white elephant projects, which it carried out with Chinese support, plunged the island nation’s economy into a deep hole from which it will not emerge for at least the next five years.

While China has yet to join the effort to restructure its debt, India has already held two rounds of negotiations with Colombo and is currently in talks with Japan, another debtor, to ensure that Sri Lanka receives relief as soon as possible. In addition to the additional USD 4 billion in emergency aid due to the Modi administration’s tireless efforts to keep the Island nation afloat, Colombo owes India almost USD 1.7 billion in bilateral debt. Despite this, Sri Lanka continues to engage in pranks in the Indian Ocean with Pakistan and China, India’s rivals. Perhaps in an effort to boost its economy, Sri Lanka is waiting for China to abandon its “zero covid” policy and permit Han Chinese visitors to spend money there. in politicsSri Lanka’s political and economic outlook is exceedingly gloomy.




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