As Sri Lanka braces for a perfect economic storm, has China overtaken India in the race to provide a lifeline?

With a junk credit rating, dwindling foreign exchange coffers, and debt obligations of US$29 billion over the next five years, Colombo is in desperate need of a hand

India’s pockets are not seen as deep enough, so the IMF or Beijing are the most likely contenders – though there are questions over what China will want in return

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A worker at a tea plantation in Sri Lanka, where a drive to become the world’s first 100 per cent organic food producer has threatened its prized tea industry and triggered fears of a crop disaster that could deal a further blow to the beleaguered economy. Photo: AFP

Published: 5:00pm, 3 Oct 2021

Saddled with billions of dollars of debt and a junk credit rating, Sri Lanka is caught in a perfect economic storm, with near-empty foreign exchange coffers; a sliding currency; shortages of food, medicine and cooking gas; as well as Covid-19 cases hitting record highs. And now the island of 22 million people is staring at the spectre of default.

Finance minister Basil Rajapaksa in September conceded that Sri Lanka faces “a severe foreign exchange crisis”. After making a US$1 billion bond payment in July, its forex reserves stood at US$2.8 billion, which covers just two months of imports – and a further US$1.5 billion in foreign debt matures next year. Sri Lanka is at a one-year default probability of 28 per cent, according to a Bloomberg gauge; any nation rated over 1.5 per cent is seen as being at high risk of failure to pay. Fitch Ratings notes the government will have to pony up US$29 billion between now and 2026 to service debt repayments.

The opposition says the only way to avert financial disaster is a bailout from the International Monetary Fund (IMF), and the agency – which played a key role in helping Sri Lanka overcome balance of payment crises in 2009 and 2015 – says it “stands ready to discuss options”. An IMF rescue, however, would involve stringent financial terms and would be a humiliation for the country’s strongman president, Gotabaya Rajapaksa, who rode to power in 2019 on promises of restoring prosperity.

Gotabaya – the brother of finance minister Basil – believes “home-grown remedies” along with help from “all-weather friend” China and its closest neighbour, India, along with other friendly countries such a Bangladesh, can fix the problems. But opposition parliamentarian Harsha de Silva dismisses such solutions as “band-aids that won’t provide the rigorous fiscal and monetary framework” to restore economic health or foreign investor confidence. “They’d just be kicking the can down the road,” he said.

If Sri Lanka doesn’t turn to the IMF for a lifeline, China is the only country with the financial means to offer help on the scale it needs, observers agree. China, which values Sri Lanka as a critical Indian Ocean shipping hub, has emerged as the island’s lender of last resort and eclipsed India as the largest exporter. The Chinese have also become Sri Lanka’s largest foreign investor and biggest bilateral creditor, holding 15 per cent of its external debt.

President Gotabaya Rajapaksa rode to power in 2019 on promises of restoring prosperity. Photo: AP

Indian diplomats say New Delhi, despite concerns over Beijing’s mushrooming presence, doesn’t have the deep pockets to solve Sri Lanka’s myriad problems. “What India can give is a drop in the ocean compared to what Sri Lanka needs,” said one, speaking on condition of anonymity.

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