While government critics and the Opposition in Sri Lanka raise concern over the Rajapaksa administration’s growing reliance on China, in the wake of Colombo seeking a new $700 million loan from Beijing, a State Minister has said it is China that has the “most amount of cash now”.
“In different times in world history, different countries have been the ones who have had the most amount of cash. And now it happens to be China, so China will naturally invest all over the world,” Ajith Nivard Cabraal, State Minister of Money and Capital Market and State Enterprise Reforms, told The Hindu in a recent interview, on Sri Lanka’s response to the economic impact of the global pandemic. “I think we should all respect that,” said the Minister, who was the Governor of the Central Bank of Sri Lanka during Mahinda Rajapaksa’s last term in office.
Amid the World Bank and International Monetary Fund’s (IMF) worrying forecast of a GDP contraction up to almost 7%, credit rating agency Moody’s downgrading of Sri Lanka by two notches to the “very high credit risk” category, the daunting $4.5 billion foreign debt due in the coming year, falling revenues and rising living costs, the Minister expressed optimism. Sri Lanka is exploring different options to repay its debt, including additional loans from China, currency swap facilities with India and China, and Samurai and Panda bonds, he said.
Mr. Cabraal’s remarks came a week after a high-powered delegation from Beijing flew into Colombo, and met President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa, who is also the Finance Minister. China, which sanctioned a $500 million loan in March to help Sri Lanka cope with the coronavirus’s blow, is likely to favourably consider the Rajapaksa government’s request for an additional $700 million now, having pledged support to the island nation’s pandemic recovery effort. Further, Sri Lanka is also negotiating a nearly $1.5-billion currency swap facility with the People’s Bank of China. Sri Lanka owes China over $5 billion so far.
“Nobody says China has given $1.5 trillion loans to the U.S.? We are talking about $700 million coming in... these are the trade practices, financing practices, prevalent in the world. Each country works out their own financing arrangements in line with what they feel is best for them,” Mr. Cabraal said, adding, other countries such as Japan, the U.S. and India have also been big investors in Sri Lanka. The U.S., for instance, “is a very strong investor in Sri Lanka’s sovereign bonds. I met the Indian CEO forum here, and I was quite surprised that there are more than 50 in Indian CEOs here.”
Government critics, including former Finance Minister Mangala Samaraweera, has urged the Rajapaksa administration to engage the IMF, rather than fall into a “Chinese debt trap”, but the government has ruled out an IMF bailout.
The rapid credit facility that the government had earlier sought from the multilateral lender is yet to come through. Expressing displeasure, Mr. Cabraal said: “Rapid means rapid, no. Where is rapid in October when the accident occurred in March,” adding the government would still talk to the IMF.
While President Rajapaksa has vowed to disprove the “Chinese debt trap analysis”, few other sources seem as willing to lend readily. As for India, the Reserve Bank of India signed a $400 million swap agreement with Sri Lanka in July, to help boost Sri Lanka’s foreign reserves, and is perusing a further $1 billion requested by Sri Lanka. New Delhi is also yet to respond to PM Rajapaksa’s request for a debt moratorium — Sri Lanka owes $ 960 million to India — but Mr. Cabraal observed bilateral moratoriums cannot help much. “Emerging nations have all faced external sector stresses, which is not peculiar to Sri Lanka. Recently, some of the international agencies had provided some support for around 70 odd countries, which have been ad-hoc arrangements. This is a global problem, which needs a global solution,” he said.
Despite the external sector weakening significantly, Sri Lanka is “fortunate”, in Mr. Cabraal’s view. The country’s foreign reserves have “not been affected too much”, exports have “held firm” and remittances have been “pretty strong”. In September, Sri Lanka recorded over $700 million from worker remittances. Exports in July crossed $1 billion and the government’s move to restrict imports “has paid off”, according to Mr. Cabraal. “Our foreign reserves will be around $5.8 billion. I would say that is not an uncomfortable level.” A clearer picture will emerge only by end of the year, as the Department of Census and Statistics postponed the release of the second quarter GDP figures until then.
However, Sri Lanka’s challenge is far from over. It remains to be seen if the remittances will continue flowing in. Some 50,000 Sri Lankan migrant workers, who were employed in West Asian countries, want to return, while thousands lost their jobs and at least 67 succumbed to Covid-19 in their host countries. Domestically too, a new wave of COVID-19 infections is rapidly spreading within the garment manufacturing sector that is crucial to exports.
Meanwhile, Sri Lanka’s revenues have fallen drastically, by an estimated LKR 440 billion (about $2.3 billion), also in the wake of tax cuts on imported items, prompting economists to emphasise a sound fiscal policy in the coming budget. Asked if the government was taking a fresh look at its tax regime to boost revenues, including considering a wealth tax that the IMF has recommended in its recent World Economic Outlook, Mr. Cabraal said: “You cannot make poor people rich, by making the rich people poor…we don’t want to put mansion taxes and these silly taxes which have actually crippled the more affluent people and remove them from the equation of providing jobs and providing support,” adding that the upcoming Budget, to be tabled next month, would reflect a “a balanced partnership”, where small and medium scale businesses will be supported, so they can extend job opportunities to the poor.