Sri Lanka stares in debt abyss

Mayank Chhaya-

China owns between 10 and 20 percent of Sri Lanka’s debt and its help is seen as vital for the country to emerge from the current existential crisis.

As Colombo begins to extricate itself from unprecedented political morass after the dramatic ouster and exit from the country of former President Gotabaya Rajapaksa, its biggest challenge is how to restructure its external debt. As part of it, restructuring what it owes to China could be an important step.

China’s foreign ministry spokesperson Wang Wenbin recently said that “shortly after the Sri Lankan government announced to suspend international debt payments, Chinese financial institutions reached out to the Sri Lankan side and expressed their readiness to find a proper way to handle the matured debts related to China and help Sri Lanka to overcome the current difficulties.”

Against its current foreign exchange reserve of $2 billion, it has a total debt payment of $7 billion due this year. Of that, $1 billion worth of notes were set to mature this month.

It is a measure of how important the Chinese help would be that on the sidelines of the recent G20 meeting, U.S. Treasury Secretary Janet Yellen said at a news conference, “China is, of course, a very important creditor of Sri Lanka. Sri Lanka is clearly unable to repay that debt. And it’s my hope that China will be willing to work with Sri Lanka to restructure the debt — it would likely be both in China and Sri Lanka’s interest.”

It is hard to say if Beijing will restructure the Sri Lankan debt since it goes against their normal practice. It may not like to set a precedent with Colombo.

There are those who think that Sri Lanka’s real debt challenge is its commercial borrowing in the capital markets. That borrowing is said to be 53 percent of the total external debt. Many think it is this profligate commercial borrowing that has pushed the country into the current crisis.

Meanwhile, in a country of 22 million people in the grip of its worst economic and political crises, the entrenched political order has triumphed yet again.

Barely a week after its exultant citizens took victory laps over forcing President Rajapaksa to flee the country and thinking that they were finally witnessing the advent of a new order, the deeply hued establishment figure, Ranil Wickremasinghe rose to become the country’s president.

Wickremasinghe, 73, a record-breaking six-time prime minister of the Indian Ocean Island nation, has realized his career-long ambition to become president. His emergence as president is a gut punch to hundreds of thousands of young Sri Lankans who protested for weeks to oust Rajapaksa.

That Wickremasinghe’s United National Party has only one seat, himself by nominating himself, is a disturbing illustration of how the entrenched political order can rally around any power play. His survival depends on the Sri Lanka People’s Party or Sri Lanka Podujana Peramnua (SLPP) of the ousted Rajapaksa brothers, Mahinda and Gotabaya.

Therein lie the fears that Wickremasinghe would be too beholden to the Rajapaksas to chart a truly new course. His detractors, of which there are millions, also apprehend that he might be forced to protect the Rajapaksas because his political survival depends on their party.

He got the support of 134 members of parliament in a 225-member house which under the circumstances is a comfortable position to be in. He will remain in office until 2024 when elections are scheduled to take place although it is questionable if the country can afford the expense on the elections.

Wickremasinghe was elected through a secret ballot possibly to shield those who voted for him against continuing public hostility. Many lawmakers have avoided saying publicly that they voted for him because they fear that Sri Lankans might turn on them.

Wickremasinghe takes over a bankrupt country which is also deeply divided. His most immediate task is to secure some measure of financing to keep the economy afloat. To that end, comments by Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), could be music to his ears. Before the vote, she told the financial magazine Nikkei Asia that the organization hoped to complete the rescue talks “as quickly as possible.”

There is widespread feeling that his rise could keep the pot boiling among those protesters who worked so assiduously to upend the entrenched political establishment emblematized by the Rajapaksas.