Sri Lanka sinks deeper into China’s grasp as debt woes spiral
Colombo to borrow $1bn from China and issue $250m Panda bonds before year-end
Sri Lanka has again turned to China for a fresh injection of cash, which will come during the final quarter of 2018, as it prepares for a crippling debt repayment cycle that will begin in 2019
Sri Lanka has again turned to China for a fresh injection of cash, which will come during the final quarter of 2018, as it prepares for a crippling debt repayment cycle that will begin in 2019. But the $1.25bn in loans will push Sri Lanka deeper into Beijing’s grasp.
China is already the largest lender to the south Asian island.
The Central Bank of Sri Lanka is working with its Chinese counterpart, the People’s Bank of China, to issue the equivalent of $250m worth of renminbi-denominated
Panda bonds. Sri Lanka has already secured a $1bn syndicated loan from the China Development Bank on terms the central bank says were more favourable than those Western international lenders were offering. The first $500m tranche is due to be transferred this week.
Sri Lanka retains an affinity for Chinese loans rather than international sovereign bonds, loans from the International Monetary Fund or other funding options. At the same time, it is being warned that its foreign reserves, now at $8.5bn, are inadequate.
Between 2019 and 2023, Sri Lanka has to come up with $17bn for maturing foreign loans and debt servicing. Its lenders include the China Development Bank, the governments of Japan and India as well as multilateral institutions such as the World Bank and Asian Development Bank.
Indrajit Coomaraswamy, governor of the central bank, said Sri Lanka diversified away from a tradition of only raising money through dollardenominated international sovereign bonds in an effort to better handle external debt pressure.
“Our debt dynamics are challenging, but manageable,” Mr Coomaraswamy told the Nikkei Asian Review. “The debt servicing next year will be a little over $4bn, including an ISB of $1.5bn, Sri Lanka development bonds and payments for bilateral and multilateral debts.”
Sri Lanka, which has an $87bn economy, will actually have to grapple with more debt payments in 2019. Its current-account deficit of 2.2 per cent of gross domestic product will push its total debt burden to be paid for the year to $7bn.
“We are an outlier in terms of our debt indicators amongst our ratings peers,” Mr Coomaraswamy said, referring to central bank figures that say the country’s debt is 77 per cent of its GDP. This is higher than the debt-to-GDP ratio of neighbours India, Pakistan, Malaysia and Thailand.
The country’s accumulated foreign debt is estimated at $55bn. Chinese lenders hold 10 per cent of this total, Japan accounts for 12 per cent, the Asian Development Bank 14 per cent and the World Bank 11 per cent.
Sri Lanka’s mounting burden has earned it some notoriety, with some observers saying the country is falling into a debt trap of Chinese design. This view gained currency last year, after $1.1bn in debt was written off in exchange for a long-term lease on the deepwater port of Hambantota, near the southern tip of Sri Lanka. Chinese loans worth $1.5bn were used to build the port, the lease to which is held by a state-owned Chinese company.
Mahinda Rajapaksa, the former president of Sri Lanka who presided over the end of a near 30-year civil war, opened the door to Chinese lenders.
From 2010 till 2015, Mr Rajapaksa’s final years in office, China poured $4.8bn worth of loans into building the Hambantota port, a new airport, a coal-fired power plant and highways. By 2016, the Chinese had loaned Sri Lanka $6bn, fuelling an infrastructurebuilding spree.
But the largest slice of debt that will mature over the next five years predates the Chinese lending boom. Multilateral institutions gave Sri Lanka 10-year grace periods and 30- to 40-year maturities on loan deals signed when the Indian Ocean nation was considered to have successfully embraced an open, liberal economy.
“We were a bit of a donor darling because, after Chile in 1974, we were second, and got a lot of concessional loans from the World Bank and the Asian Development Bank as a low-income country that had opted to liberalise,” Mr Coomaraswamy said. A “significant portion of the debt stock is that concessional money that came from multilateral and bilateral financial sources.”
Sri Lanka’s debt has dogged the coalition government of President Maithripala
Sirisena. After nearly four years in office, the government has little to show in the way of foreign direct investment. It attracted
$1.7bn worth of FDI in 2017, far lower than the ambitious target of $2.5bn. Likewise, the government has failed to improve the country’s global ranking for ease of doing business. Sri Lanka sits in 111th place.
Its multibillion dollar trade deficit has been another drag.
Equally troubling, the government has made little headway against burdensome state-owned enterprises. They include Ceylon Petroleum Corporation, Ceylon Electricity Board, the
Sri Lanka Ports Authority and Sri Lankan, the national carrier, whose combined debt is estimated at $7.93bn, according to the IMF.
Mr Coomaraswamy is banking on government policies beyond fiscal commitments to slow the rising tide of red ink. “To overcome the situation we need to get non-debt creating inflows,” he said. “We need to get more FDI and to boost export growth.”
Sri Lankan prime minister Ranil Wickremesinghe (left) meets Chinese president Xi Jinping before a meeting at the Great Hall of the People in Beijing © Getty