Category: News

As Sri Lanka avoided an immediate debt default, averting a massive crisis, the country’s policymakers should now make use of the breathing space provided by the Indian credit lines to the tune of US $ 1.9 billion to engage with its creditors, preferably equipped with an International Monetary Fund (IMF) programme, to chart a durable and a sustainable path for foreign debt management, according to economists.

India last week confirmed a US $ 400 million swap line, under the SAARC currency swap arrangement and a deferral of A.C.U. settlement of US $ 515.2 million by two months, which would temporarily stop the country’s foreign reserves bleeding.

During the weekend, India announced the extension of further financial support with two bilateral funding lines—US $ 1.0 billion assigned for importation of food, essential items and medicines and US $ 500 million for importing fuel from India.

But all is not well with Sri Lanka’s external sector. Sri Lanka approximately has a US $ 1.6 billion monthly import bill and US $ 6.1 billion worth of foreign obligations to be settled during the remainder of 2022, including a billion dollar sovereign bond maturing in July.

As the path for the tourism industry that has a US $ 4.5 billion potential is still uncertain, with the direction of the pandemic, Sri Lankan policymakers will have to work harder to deal with the country’s external debt, which has bunched up till 2025.

Hence, the economists, who have long been advocating Sri Lankan policymakers since the onset of the pandemic to seek debt restructuring, have doubled down their efforts, as the Indian credit lines and debt deferment provide Sri Lanka a delayed opportunity to engage with its lenders to negotiate a durable and a less painful path for foreign debt and broader economic reforms.

“Now SL has 2 months of breathing time & must settle to hard econ(omic) reforms + honouring its promises to India to realise full gains; Should realise India can’t fully bailout SL; time to use space for negotiating with IMF for a permanent solution; Kudos to SL’s man in Delhi, @MilindaMoragoda,” said former Central Bank Deputy Governor Dr. W.A. Wijewardena on Twitter, applauding Sri Lankan High Commissioner in India Milinda Moragoda, who brokered the deal.

As Sri Lanka avoided an immediate debt default, averting a massive crisis, the country’s policymakers should now make use of the breathing space provided by the Indian credit lines to the tune of US $ 1.9 billion to engage with its creditors.

The Ceylon Electricity Board (CEB) must provide US dollars to the Ceylon Petroleum Corporation, if it needs fuel continuously, Minister of Energy Udaya Gammanpila said adding that if the CEB provides the dollars, the Ministry of Energy is prepared to import and supply the required stocks of fuel for power generation.

“Amidst the prevailing dollar crisis in the country, the CPC goes through serious difficulties to earn USD $400 million every month, to ensure the adequate supply of fuel stocks required for transportation and other industries,” Minister Gammanpila noted.

According to Minister Gammanpila, the Ministry of Energy has informed the CEB three months ago that if they require fuel for power generation, they should inform in advance.

“However, the CEB informed us on the 11th of January that they require Diesel from the 13th of January. We do not possess additional stocks of Diesel to supply on such short notice,” Minister Gammanpila pointed out.

He emphasized that the Ceylon Petroleum Corporation is ready to import and supply fuel if the Ceylon Electricity Board provides the necessary dollars, adding that the CEB can also directly import fuel by themselves.

At the same time, Minister of Power Gamini Lokuge says that a discussion will be held with the Ceylon Petroleum Corporation to obtain fuel until the 22nd of this month.

“The CPC has provided 3000 Metric Tonnes of fuel for the power generation at the Kelanitissa Power Plant. It is sufficient to ensure an uninterrupted supply of power until Tuesday (Jan. 18),” Minister Lokuge noted.

According to the Minister, the CPC is informed of the amount of fuel required annually.

“Due to the concessions granted to the consumers during the COVID-19 pandemic, the CEB is yet to receive arrears payments worth around Rs. 44 billion,” Minister Gamini Lokuge pointed out.

Officials say the city being built in the sand will rival other financial centres such as Dubai, Singapore or Hong Kong

“An economic game changer” is how officials describe Colombo Port City, a shiny metropolis soaring out of the water along the Sri Lankan capital’s seafront.

Next to Colombo’s leafy business district, the huge expanse of sand reclaimed from the sea is being transformed into a high-tech city which will host an offshore international financial centre, residential areas and a marina – prompting comparisons with Dubai, Monaco or Hong Kong.

“This reclaimed land gives Sri Lanka a chance to redraw the map and to build a city of world class proportions and functionality – and compete with Dubai or Singapore,” Saliya Wickramasuriya, a member of the Colombo Port City Economic Commission, told the BBC.

But critics question how much of an economic game changer it will really be for Sri Lanka.

For a start, in order to reclaim the 665 acres (2.6 sq km) of new land, the country needed the China Harbour Engineering Company (CHEC) to invest $1.4bn. In return, the firm has been given 43% of it on a 99-year lease.

After several years of dredging, construction activity is gaining momentum and the new city is taking shape.

Huge cranes supervised by Chinese engineers are moving concrete slabs, while earth movers fill trucks with tonnes of sand. A river passing through the reclaimed land has already been dredged, allowing access for small boats and yachts.

Officials estimate it will take about 25 years to complete the project, the first of its kind in South Asia.

Sri Lanka says the land under its control and the area given to the Chinese will be leased to multinational firms, banks and other companies. The government may also charge a levy on their revenue.

About 80,000 people are expected to live in the new city, which will offer tax holidays for those who invest and do business there. All transactions in the special economic zone, including salaries, will be in US dollars.

The Port City project was officially unveiled during Chinese President Xi Jinping’s visit to Colombo in 2014, a year after he launched his Belt and Road Initiative – an ambitious plan to build road, rail and maritime infrastructure links across Asia and Europe to boost trade.

Sri Lanka turned to China for financial help to rebuild after a long war with Tamil separatists ended in 2009. Western nations had raised concerns over human rights abuses.

At the time of the Xi Jinping visit, Mahinda Rajapaksa was Sri Lanka’s president but he lost elections later that year, with concern over Chinese loans – in particular for a vast port in the south at Hambantota – one of the issues on voters’ minds.

Eight years later, and Mr Rajapaksa is now back in power, as prime minister, with his younger brother Gotabaya as president.

But Hambantota port is no longer in Sri Lanka’s hand. Under the last government in 2017, Sri Lanka handed it over to Chinese control after struggling to pay off the debt to Chinese firms, with some of the money earned reportedly being used to pay off other debts.

So perhaps it is not surprising that not everyone in Sri Lanka shares the enthusiasm Port City officials have for the project.

Concerns over the scheme are numerous, and include the environmental impact of a project of this size.

Others fear the benefits of such a development will not benefit the country as much as supporters suggest it will.

“One potential negative around the Port City is the fact there are very significant tax holidays that are built into its law. There’s a possibility of up to 40 years’ worth of tax holidays for some investors,” Deshal de Mel, an economist with Verite’ Research, said.

“Having this large tax concession does not enhance Sri Lanka’s overall revenue proposition.”

The tax regime has triggered other worries. The US has warned that the relaxed business environment could become a haven for money launderers.

Mohamed Ali Sabry, Sri Lanka’s justice minister, disagrees.

“There’s no way that can happen because the normal criminal law applies here. We have our money laundering act and we have our financial intelligence unit. So, with all those things there is no way that somebody can get out of it,” he told the BBC.

With China increasingly assertive on the global stage, there are also concerns over its long-term strategic ambitions.

The growing Chinese footprint in Sri Lanka is a worry for India in what has traditionally been seen as its back yard.

The Port City aims to lure away multinational firms and investors already based in India, which could dent investments and job opportunities there.

But some say Sri Lanka also has much to fear from Colombo Port City.

In 2020, Laos avoided bankruptcy only by selling part of its energy grid to China to help fund a railway linking the two countries.

As with Hambantota, could Colombo Port City end up becoming a Chinese outpost in the long run?

“At the moment the way this government has agreed to the Chinese, China has taken over as much as everything in the Port City, the whole thing,” opposition MP Rajitha Senaratne told the BBC.

“One day, actually Sri Lanka won’t have any say in this project.”

Chinese academic Zhou Bo disagrees, saying the aim is for both countries to benefit.

“China’s Belt and Road Initiative is not a charity. We also want to be mutually beneficial. That means we also want our investments to have economic returns,” Mr Zhou, a former People’s Liberation Army senior colonel who’s now with Tsinghua University in Beijing, told the BBC.

“China has no intention to trap any country into debt.”

Sri Lankan officials take the same line.

“The entire area is under Sri Lankan sovereign control. The right to patrol, police, immigration and other national security duties lie with the Sri Lankan government,” said Saliya Wickramasuriya, of the Port City Economic Commission.

But Sri Lanka, currently going through an unprecedented economic crisis, has limited options.

The Covid pandemic has devastated its lucrative tourism sector and dented overseas employment, sending foreign exchange reserves plummeting.

The country’s external debts have surged to more than $45bn and it owes around $8bn to China alone.

Amid appeals for financial help, Sri Lanka last week asked visiting Chinese foreign minister, Wang Yi to restructure its debt repayment to Beijing.

But with repeated downgrades by international ratings agencies, Colombo’s chances of going to international investors for further loans appear slim.

Only China has long-term ambitions – and deep pockets.

But there could be strings attached – some believe a city like Hong Kong in Sri Lanka would help China tighten its grip in this part of Asia in the years ahead.

The High Commissioner of India, Gopal Baglay, the Sri Lankan Minister of Youth and Sports, Minister of Development Co-ordination and Monitoring and State Minister of Digital Technology and Enterprise Development, Namal Rajapaksa, and the Minister of State for Estate Housing and Community Infrastructure jointly Jeevan Thondaman handed over house keys to more than 1000 beneficiaries from plantation areas of Sri Lanka at a public event in Kotagala on January 15.

Members of Parliament S.B Dissanayake and M. Rameshwaran and other dignitaries took part in the well-attended event.

Speaking on the occasion, High Commissioner conveyed Pongal greetings in Tamil. He stressed that India will stand with Sri Lanka and continue to work for the development of Indian origin Tamil community. He noted that the community was an organic link between India and Sri Lanka and underlined that the Festival of Pongal represented shared civilizational ties between the two countries.

The handed over houses were built under the third phase of the Indian Housing Project. 4000 houses are being constructed with grant assistance from the Government of India in plantation areas, spread across seven districts of Sri Lanka, under this phase for the estate workers in Sri Lanka. Around 3000 houses have already been handed over to beneficiaries till date and handing over of close to 750 houses is being scheduled under this phase. The remaining houses are at various stages of implementation.

Indian Housing Project is a flagship development assistance program in Sri Lanka which is being carried out in different phases. 46,000 houses were built/repaired in the Northern and Eastern Provinces of Sri Lanka in the first two phases. Another 10,000 houses shall be constructed in the plantation areas in the next phase. This would take the Government of India’s overall commitment under the project to 60,000 houses.

The dignitaries took part in a traditional ‘Maatu Pongal’ ceremony prior to the handing over event, which was attended by thousands and featured cultural performances.

Celebration of Pongal in Sri Lanka attests to the abiding cultural linkages between the people of India and Sri Lanka as well as the shared heritage. Development assistance is a key pillar of bilateral relations between the two countries. At a total quantum of around USD 3.5 billion, development assistance from India cuts across sectors spanning from infrastructure development to all aspects of daily human lives such as education, health, livelihood, among others. Estate workers from plantation areas have been at the centre of such assistance and several projects implemented through grant assistance by the Government of India including the 150-bed hospital in Dickoya, multi-purpose hall in Saraswathy Central College in Pussellawa etc reinforce India’s ongoing focus on the region under the ‘Neighbourhood First’ policy.

The Government of Sri Lanka is optimistic of succeeding in its plan to restructure its debt with bilateral and multilateral lenders if its current attempts to restructure the debt with the Chinese Government materialises, the Treasury told The Sunday Morning Business.

Speaking to The Sunday Morning Business, Treasury Secretary S. R. Attygalle stated that if the Government of China were to extend its support to Sri Lanka, and given the existing supporting ally, the Government of India, other lenders would also be willing to help Sri Lanka restructure its debt repayment.

“India has supported us, and similarly the Cabinet requested China to restructure the debt. We will see how it goes; when these two Governments do so, certain others will also follow,” Attygalle said.

United National Party (UNP) Leader and former Prime Minister Ranil Wickremesinghe, in an interview held last week for international news agency WION, opined that Sri Lanka would not be restructuring its debt with the Chinese Government.

“If China restructures its debt, it will also have to do so for a large number of countries on the Belt and Road Initiative, so I don’t think there will be restructuring on the debt, because you can’t restructure the debt of one country and not on the others,” Wickremesinghe highlighted.

Meanwhile, responding to this claim by Wickremesinghe and others in opposition, Attygalle said that there could be different forms of restructuring debt; for example, one could be given the option of not settling payments now but doing so after two years and so on.

“If the lender is willing to give, then what is the problem? It’s his money and he is saying to pay later. These are bilateral loans with China and if the lender is willing to postpone, there is no problem,” Attygalle stressed.

On 9 January, President Gotabaya Rajapaksa put forward this request at a meeting held with Chinese Foreign Minister Wang Yi.

“The President pointed out that it would be a great relief to the country if attention could be paid to restructuring debt repayments as a solution to the economic crisis that has arisen in the face of the Covid-19 pandemic,” the President’s Office said.

The statement also said China was asked to provide “concessional” terms for its exports to Sri Lanka, which amounted to around $ 3.5 billion last year, without providing further details.

Further, Rajapaksa also offered to permit Chinese tourists to return to Sri Lanka provided they adhered to strict Covid regulations.

Subsequent to this announcement, Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal on 12 January stated that the Sri Lankan Government was presently in negotiations with China to obtain a loan to cushion the effect of the existing debt repayments to China.

According to Cabraal, the Government’s strategy is to restructure the country’s debt structure in a manner that does not inflict pain on investors who kept faith in the country. Cabraal noted that the Government would implement its debt restructuring process while considering the interests of investors.

China is Sri Lanka’s fourth biggest lender, behind international financial markets, the Asian Development Bank (ADB), and Japan. According to official data, China has lent Sri Lanka over $ 5 billion (£ 3.7 billion) in the last decade for projects including roads, an airport, and ports.

Sri Lanka has also received billions of dollars of soft loans from China but the island nation has been engulfed in a foreign exchange crisis, which some analysts opine have pushed it to the verge of default.