Japan could forgive some of Sri Lanka’s debt in planned meeting with its creditors: report

Move could be more effective at winning Colombo’s support, observers note, with Tokyo keen to stop Sri Lanka’s biggest creditor, China, from exerting more influence
Discussions expected to focus on reducing debt payments, postponing repayment deadlines, with other creditor nations asked to help ease Colombo’s burden

Japan

Julian Ryallin Tokyo

Published: 8:30am, 19 Oct 2022

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Japan intends to host a meeting of Sri Lanka’s creditor states before the end of the year as part of efforts to solve the nation’s financial problems, the Yomiuri newspaper has reported, with some analysts suggesting that Tokyo could take the initiative by forgiving a portion of the debt that it is owed.

Any assistance would be more significant than simply helping another Asian government stave off a full-blown economic crisis, they point out.

Tokyo will be equally keen to stop Sri Lanka’s biggest creditor, China, from exerting more influence on the Colombo government as it struggles to pay off its debts, observers say, while a well-publicised conference that examines the root of Sri Lanka’s debts may dissuade other governments from accepting large loans from Beijing.

Japanese Prime Minister Fumio Kishida (right) and Sri Lankan President Ranil Wickremesinghe during their meeting in Tokyo in late September 2022. Photo: Kyodo

Quoting sources in the Japanese government, the Yomiuri reported that Sri Lankan President Ranil Wickremesinghe requested assistance from Japan when he met Prime Minister Fumio Kishida in Tokyo in late September. Wickremesinghe was in Tokyo to attend the funeral of Japan’s slain former leader Shinzo Abe.

Discussions at the meeting are expected to focus on ways to reduce debt payments and postpone repayment deadlines, while other creditor nations will be asked to help ease the burden on Colombo.

According to Sri Lankan government figures, the country has borrowed a total of US$2.74 billion from Japan, along with around US$1.68 billion from India and millions from France, Austria, South Korea and other nations. By far the biggest debt, however, is owed to China. Colombo must repay Beijing US$7.32 billion, which amounts to 52 per cent of its total overseas debt.

In total, including amounts owed to international institutions, the nation’s external debt at the end of June came to US$46.6 billion, or about 70 per cent of its gross domestic product.

Sri Lanka has also struggled as a result of the coronavirus pandemic, which has devastated its tourism sector. The situation has been exacerbated by rapidly rising prices for food and other resources since the Russian invasion of Ukraine. As a consequence of the deepening economic challenges, the government in April announced an emergency measure to suspend repayment of foreign debts.

Critics say the Sri Lankan government has brought some of the hardship upon itself by poor policy decisions, with a new port in Hambantota held up as a prime example. In spite of criticism of the proposal from an expert panel, Colombo opted to go ahead with the project with US$1.1 billion in loans from Beijing.

The facility failed to turn a profit and in 2017, a Chinese state-owned company stepped in to purchase a 99-year-lease for US$1.1 billion. The deal with China Merchants Group enabled Colombo to repay debts to Chinese banks but has effectively given Beijing an important toehold in the Indian Ocean as it seeks to expand its Belt and Road Initiative.

Chinese ship Yuan Wang 5 is docked at the Hambantota port in August 2022. Photo: Facebook

Critics charge that the “debt trap” that Sri Lanka has fallen into enables China to exert political leverage on the government and they warn that other developing nations could make the same mistake.

“China is now attempting to develop a network of ports for military use, such as in Sri Lanka, Pakistan and Djibouti, and it uses debts to advance that aim,” said Yoichi Shimada, a professor of international relations at Fukui Prefectural University.

“They can also use that debt to influence and intimidate other countries, which is completely different from how other nations provide assistance to developing nations,” he said.

Shimada suggests that Tokyo could give up a large portion of the debt that is owed to it, with such a move more effective at winning Colombo’s lasting support than exerting pressure.

“It would also send a message to other countries that there are better alternatives available to them when they need assistance,” said Shimada, who pointed to the Solomon Islands as being another country “in a precarious position” with regard to financial support from China.

A man shops for vegetables at a market in Colombo in June 2022. Sri Lanka’s external debt at the end of June came to US$46.6 billion, or about 70 per cent of its gross domestic product. Photo: AP

Ryo Hinata-Yamaguchi, a project assistant professor at the Research Center for Advanced Science and Technology at the University of Tokyo, agreed that the priority for the Japanese government was “to make sure that it has good relations with Colombo so they do not come under more Chinese influence”.

“Japan has been quite active in the past in terms of aiding countries in Southeast Asia that have been economically struggling, but China has stepped in more recently with an aggressive programme of so-called aid to these governments,” he said.

“Japan is taking the lead and will use this meeting to make sure that Sri Lanka does not become even more indebted to China.”