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

The Star (St. Lucia) - Business Week - - FRONT PAGE - BY MARWAAN MACAN-MARKAR, ASIA RE­GIONAL FT COR­RE­SPON­DENT

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

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