Sri Lanka’s BOP crisis is an eye-opener

(Colombo International Container Terminals, Sri Lanka)

In a curious twist to Sri Lanka’s famous “debt trap”, Colombo has approached New Delhi and Beijing in panic to help it somehow meet the unprecedented foreign debt obligations. Eyebrows will be raised. How come Beijing? Yes, it is about Beijing helping Colombo to tackle its real “debt trap” – namely, repayment of maturing loans in the region of $20.9 billion between 2019 and 2022, which Sri Lanka owes to international capital markets.

The fact of the matter is that China accounts for only about 10% of Sri Lanka’s external debt of $64 billion as of end-2018. The biggest portion of Sri Lanka’s foreign loan portfolio is in dollar-dominated international sovereign bonds, accounting for almost 50% of Sri Lanka’s total external debt. The remaining debts are to Japan, India, the Asian Development Bank and the World Bank.

Last Thursday, the governor of Sri Lanka’s Central Bank Indrajit Coomaraswamy told a public forum in Colombo that both Reserve Bank of India and the Bank of China, which initially offered to provide $400 million and $300 million respectively – India through a currency swap deal and China through a bank loan – may be scaling up their respective offers to $1 billion each.

As he put it, “Sri Lanka’s friends, the two regional giants, have stepped up to support us in this time when we were pushed into a rather difficult corner.” What a delightful irony!

The immediate requirement was for Colombo to pay back a $1 billion international sovereign euro-bond by dipping into foreign exchange reserves. Colombo’s attempts to raise funds from the international bond market have failed. By the end of 2019, Colombo faces the spectre of a record debt of $ 5.9 billion that must be met. The country’s foreign reserves will be severely depleted if India and China do not help out.

Plainly put, Sri Lanka’s so-called Chinese “debt trap” is actually disinformation with the mala fide intention to bring China into disrepute, especially by those quarters for whom the Belt and Road Initiative is an eyesore.

The fact of the matter is that, ironically, China is emerging as Sri Lanka’s lender of last resort. Bank of China opened an office in Colombo last year to help Sri Lanka whose attempts to raise dollars from international capital markets are not succeeding due to the country’s poor rating by the western ratings agencies, which has raised the cost of international borrowing. For instance, Fitch moved Sri Lanka from B+ to B, which leaves it just four notches above default status.

Quite obviously, India and China have appeared on the same page to bail out Sri Lanka from “debt trap”. India has two swap arrangements with Sri Lanka – a bilateral one and a second within the SAARC framework. As for China, Sri Lanka finds it advantageous to borrow from China because the interest rate is very low at 2%, compared to international sovereign bonds where the interest rate hovers around 6.3%.

All in all, it appears that Sri Lanka doesn’t face a Chinese debt situation at all. The Indian analysts should take note. Of course, this does not mean that there is no rivalry for influence between India and China. India has regarded Sri Lanka as its “backyard” but Chinese presence is expanding worldwide and in South Asian region, too, and India visualizes that Colombo’s comfort level with the Chinese partner is enviable.

Yet another reality that gets overlooked is that Sri Lanka’s financial difficulties are largely self-inflicted. And it is not really the legacy of former President Mahinda Rajapaksa alone but of successive governments over time. In fact, Sri Lanka resorted to reckless international borrowing through past decades. Of course, the political instability due to the civil war conditions played its part as well.

But, basically, the country needs to build up its capital account through exports and by attracting FDI. The grim reality of the Sri Lankan “debt trap” is that the economy does not generate dollar income to pay off the dollar debt the country accumulated. It is really a “dollar crisis.”

Curiously, the US is doing nothing worthwhile to help Sri Lankan economy by way of investments or trade. Washington’s focus is on the power calculus in Colombo and the geopolitics of Sri Lanka. The primary attention last year was on the efficacy of transforming Trincomalee Port as a logistics hub of the US Navy. Actually, the IMF even made it difficult for Sri Lanka to raise money in the international markets by freezing its final payment of a $1.5 billion bailout dating back to 2016.

Simply put, the Western narrative that China seeks to push India out of Sri Lanka has an ulterior agenda of pitching India against China in a fight for influence in Colombo. The American lobby in India is not unaware of it but blithely plays it part in the Indian media. India can and should disengage from the Western narrative. At least those sections of the media, which have the resources and acumen to think and analyze the politics of our neighborhood from an Indian perspective, should refrain from lapping up the Western narrative.

At the end of the day, history, geography, politics and culture dictate that India will forever remain Sri Lanka’s most important partner country. No amount of Chinese investments in Sri Lanka can change that geopolitical reality. Besides, no Sri Lankan politician will ever accept Chinese hegemony, either.

The number one priority today for India ought to be Sri Lanka’s political stability and development. From such a perspective, India should make use of the Chinese investments in Sri Lanka by participating in the projects such as Mattala airport. Again, the Chinese-funded mega $1.4 billion Colombo Port City has just completed the reclamation of land from the sea and will soon be ready for the second phase. Investment opportunities are opening up in a big way.

The dismal experience over the East Container Terminal project of the Colombo Port shows once again that Sri Lanka is highly sensitive about Indian investments or management of strategic sectors of the economy. Paradoxically, one way of overcoming phobia could be be by joining hands with China and to jointly undertake such projects. The proposed West Container Terminal project of the Colombo Port could provide the opportunity to take such a leap of faith towards what Beijing calls the “China-India Plus” mode of cooperation.