COLOMBO -- Saddled with heavy debts, and facing a financial crisis brought on by the coronavirus, Sri Lanka appears to be doubling down: piling on more Chinese debt despite having to pay millions of dollars this year to service its current obligations.
President Gotabaya Rajapaksa has twice turned to China in the last two months, desperate for a bailout as Sri Lanka's foreign reserves dwindled to $7.2 billion in April. So far, Beijing has granted an "urgent" loan of $500 million to help it fight the virus. Then, last week, cabinet ministers approved a decision to borrow another 15 billion Sri Lankan rupees ($80 million) from the China Development Bank, to improve 105 km of roads.
Amid a brewing financial crisis, the move to seek funding for the road project has drawn flak. Sri Lanka is doing fairly well in its fight against COVID-19, with fewer than 1,000 confirmed cases so far. Its struggle with the tide of debt has been less successful. Highly placed sources say the government hopes the additional Chinese credit will help plug a hole in its budget.
Harsha de Silva, minister for economic reform in the previous government, said the current government had reached an agreement with China for at least $1 billion in additional lending, of which already $500 million was disbursed in March. But he criticized the decision to borrow for the road project. "Such projects are not priorities for the moment. This loan is just to improve roads already built, and we can always improve the roads later," de Silva told the Nikkei Asian Review.
The South Asian island nation is short of cash. The International Monetary Fund estimates Sri Lanka's net government borrowing, which combines the fiscal deficits of the central and regional governments, will rise to 9.4% of gross domestic product in 2020, up sharply from last year's 6.8%, due to the economic impact of the epidemic.
Seeking a way out of the country's financial straits, P.B. Jayasundara, secretary to the president, appealed to more than 1.2 million public-sector employees to donate all or part of their May salaries to help close the budget deficit.
The currency fell to a record-low 200.46 rupees to the dollar in April, leading the Finance Ministry to restrict imports of 156 items including food, alcohol and apparel that month.
Sri Lanka must make $4.8 billion in debt repayments this year. According to the central bank, central government debt stood at 13 trillion rupees at the end of 2019, of which 6.4 trillion rupees was foreign debt. Although the bank did not provide a breakdown of the foreign debt, Indrajit Coomaraswamy, the bank's former governor, said in an interview with Nikkei last year that China's share of total external debt was 9%, while a private-sector analyst estimated the figure at less than 15%.
China is keen to help. Hu Wei, China's ambassador to Sri Lanka, at a meeting with President Rajapaksa on April 29, pledged that China would help "revive" Sri Lanka's economy because Sri Lanka is a "special friend." Apart from the Chinese government assistance, Hu said Sri Lanka will receive help from leading Chinese companies and banks.
In response, Rajapaksa said one of his prime objectives is to attract foreign investment. "There are ample opportunities for foreign investments. ... I invite China and other countries to make use of those opportunities," he said.
Sirimal Abeyratne, chairman of the central bank's monetary policy consultative committee, said the government is in talks with the World Bank, the Asian Development Bank and the IMF. "If the government is turning to China for further borrowing, there might be good reasons for that as well, because China is now in a better position to help, as it has already brought the COVID-19 issue under control, and the borrowing might be quicker and under favorable conditions," Abeyratne told Nikkei.
Ramesh Pathirana, a cabinet spokesman, expressed optimism that the economy will bounce back, predicting the World Bank, ADB and IMF will grant moratoriums on loan repayment for at least six months. "We are also confident that countries such as China and Japan will provide us with much needed space due to the current situation," he told Nikkei.
During the presidency of incumbent Prime Minister Mahinda Rajapaksa, who is a Gotabaya's elder brother, Sri Lanka relied heavily on China for infrastructure development. China also invested heavily in the island for strategic reasons. Among the projects financed by Beijing was a $1.5 billion port in Rajapaksa's hometown of Hambantota in the country's south. However, amid claims that the port was operating at a loss, the port was leased in 2017 to China for 99 years, in return for $1.1 billion, which eased the Chinese portion of Sri Lanka's debt burden.