Sri Lanka Asks China To Restructure Its Debt As Country Faces Its Gravest Economic Crisis

Reeling under the impact of a grave economic crisis, Sri Lankan President Gotabaya Rajapaksa has requested China to reschedule the huge debt the island nation owes to Beijing.

The request to restructure the debt payment was made to the visiting Chinese foreign minister Wang Yi who met the president at his office in Colombo on Sunday (Jan 9).

"The President pointed out that it would be a great relief to the country if the attention could be paid on restructuring the debt repayments as a solution to the economic crisis that has arisen in the face of the Covid-19 pandemic.", President Gotabaya Rajapaksa’s office said in a statement on Sunday.

Rajapaksa also said that if a concessional trade credit scheme could be initiated for imports from China, it would enable the industries to operate smoothly.

Wang Yi latter announced that Sri Lanka will receive a 800 million yuan ($125 million) grant. The grant will be routed via China International Development Co-operation Agency (CIDCA) through a economic and technical co-operation agency. The money can be used to for food, medicine and infrastructure

'Debt-Trap' Diplomacy

Sri Lanka owes China over $5 billion, roughly amounting to about 10-15% of the country’s total foreign debt of $35 billion. According to other estimates, China’s total lending could be much higher when taking into account loans to state-owned enterprises and the central bank.

After dispensing billions of dollars in soft loans, China has emerged Sri Lanka's fourth biggest lender, behind international financial markets, the Asian Development Bank and Japan.

In November, Sri Lanka's foreign reserves had plummeted to $1.5 billion - just enough to pay for only about a month's worth of imports. The gross foreign reserves however reached $3.1 billion in December after the country's central bank liquidated a part of its gold holdings to boost liquid foreign assets

Sri Lanka is a key part of China's Belt and Road Initiative, a long-term plan to fund and build infrastructure linking China to the rest of the world. Critics have accused China of ensnaring poor countries by loading them with debt through this initiative.

Several observers point to the Hambantota port that was build with massive Chinese assistance. A project with no prospect of commercial viability, Sri Lanka was eventually persuaded by China to go ahead with the project. As the port struggled to make headway, Beijing demanded the port as collateral, forcing the Sri Lankan government to surrender control to a Chinese firm.

Economic Crisis

The economic meltdown in Sri Lanka, while partly attributable to the impact of the Covid crisis and the loss of tourism, has been exacerbated by high government spending and tax cuts eroding state revenues, debt repayments to China and foreign exchange reserves that have dwindled to their lowest levels in a decade. Inflation soared to a record high of 11.1% in November