Sri Lankan economy may take time to revive, vicious trap called ‘Chinese Loans’ holds it tight

Upon shocks of the Covid-19 pandemic and the Russia-Ukraine war, Sri Lanka’s over-reliance on China as a development partner proved wrong as China’s predatory debt diplomacy increased the foreign debts of the nation and amplified the crisis.
As Sri Lanka slid into a foreign exchange crisis, China just came forward with a proposal for a paltry USD 500 million concessionary loans for 10 years to deal with the economic fallout of the pandemic and showed a willingness to renegotiate only a handful of Chinese debt, standing close to USD 6.5 billion and constituting more than 10% of Sri Lanka’s total foreign debt over USD 50 billion, Dailymirror reported.
Additionally, China did not entertain Sri Lanka’s request for debt deferment of around USD 2.5 billion saying there is no such provision in their financial system, instead it evinced interest to consider providing a loan to repay debt due to it.
This year Sri Lanka needs to repay over USD 1.5 billion to China alone for debt servicing, the report stated further.
Sri Lanka’s economic crisis is self-made as the nation’s infrastructure development was based on borrowing while its foreign exchange earnings remained highly dependent on tourism which crashed due to covid.
Colombo, in its efforts to speed up its economic growth, resorted to quick fixes whereas China strengthened its manufacturing base and promoted exports at the same time.
Moreover, a better strategy for Sri Lanka would have been to ask for assistance from multilateral agencies on soft terms instead of Chinese loans near commercial terms.
According to Dailymirror, the World Bank recently agreed to provide USD 600 million in assistance to help the country meet requirements for essential imports, however, if the country resorted to World Bank loans for infrastructure development at cheaper rates rather than Chinese loans earlier, it could have avoided such a crisis.
At this time when China is dithering, crisis-hit Sri Lanka has only one option to explore, i.e. to seek USD 3-4 billion International Monetary Fund (IMF) assistance.
Sri Lanka’s economy has been in a free fall since the COVID-19 pandemic due to the crash of the tourism sector as well as foreign exchange shortage which has led to food, fuel, power and gas shortages and has sought the assistance of friendly countries for economic assistance.