China lets down Colombo in securing $2.9 billion IMF loan – Read Full Details!

Sri Lanka faces major political turmoil ahead. It will not be in a position to obtain the December IMF loan for China, its main ally.

Financial analysts based in Washington believe that Sri Lanka will miss the December IMF deadline. Instead, it will need to wait until March 2023 to receive a loan of USD 2.9 billion from the lending institution in eight equal installments. The debt of Sri Lanka has risen further as a result of deep recession, forex depreciation and a growing fiscal deficit. Inflation has significantly reduced the value of domestic debt since 2021.

Japan and India have initiated dialogues with Colombo regarding debt restructuring and reconciliation. China, however, is yet to participate in the dialogue. Beijing was also involved in the 20th National Party Congress but had very little time for Sri Lanka’s client state. At the end of 2021, the total debt of the island was USD 36 billion. This means that Sri Lanka owes China USD 7.1 billion, or 20% of its debt. At the end of December 2021, the total public debt was 115.3 percent of GDP. It has now risen to 143.7% of GDP by June 2022. The bilateral debt has increased from 12.7 percent to 20.4 percent of GDP. Ranil Wickremesinghe, President of Sri Lanka, stated that this was the process and that he had to make a move. We will have a huge advantage if we can reach an agreement before December. This would mean that we need to come to an agreement between mid-November and then go up to the IMF Board mid-December. But, I’m not sure if we can achieve it because in China, the focus has already started after the party conference. We must make it happen by January.

The political juggling of Wickremesinghe (a single MP in his party, and an ally to the discredited Rajapaksa government) is that Sri Lanka will need a bridge funding of USD850 million to survive until the next IMF board meeting. Or there will be protests like the one in July-August. The ultra-leftist parties and the government will gain political momentum as the opposition to Sri Lankan rule does not have enough power to speak up for itself. It is now up to you to decide who will provide the USD 850million bridge funding that Colombo needs to survive until March 2023.

The economic crisis in Sri Lanka was caused by poor fiscal discipline, mismanagement and corruption by Rajapaksa’s regime. They secured a 900-megawatt Norochcholia Power Station, with Chinese assistance, after taking a loan from Beijing at an apparently 11 percent interest. With Chinese assistance, Sri Lanka’s white elephant projects have plunged the Island nation into an economic depression with little hope of recovery for at least the next five years.

China has yet to join the process to restructure Sri Lanka’s debt. However, India has had two rounds with Colombo and is currently in discussions with Japan. Colombo has nearly USD 1.7billion in bilateral debt with India. The Modi government has also provided emergency assistance of USD 4billion to the island nation. Even though Sri Lanka continues to play with India’s rivals China and Pakistan, in the Indian Ocean region. Maybe Sri Lanka is waiting for China’s zero Covid policy to be lifted and allow Han Chinese tourists access to the island nation in order to revitalize its economy. The political and economic outlook for Sri Lanka are very grim.


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