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Chinese loan delayed to Sri Lanka

February 7, 2019 | Expert Insights

A $300 million loan offered by the Bank of China to Sri Lanka is facing delays, report government officials familiar with the negotiation. 

Background

The China–Sri Lanka relations refers to bilateral relations between the People's Republic of China and the Democratic Socialist Republic of Sri Lanka. There is a Chinese embassy located in Colombo and a Sri Lankan embassy situated in Beijing. Historical and cultural ties between the two countries extend back hundreds of years.

Relations between both countries during the rule of Sri Lankan president, Mahinda Rajapaksa, resulted in many agreements and saw closer relations due to Rajapaksa's pro-China stance. Under the current Sri Lankan president, Maithripala Sirisena, relations remain strong with Sirisena interested in balancing both Chinese and Indian influence in the country. Despite this, recent developments have shown a "pro-China" slant to Sri Lanka's current foreign policy evident in the continued Chinese investment in Sri Lanka and the country's support of China's position in the South China Sea dispute.

Sri Lanka is a major country on the String of Pearls which is part of the Chinese strategic initiative in the Indian Ocean, known as the Maritime Silk Road and is part of the bigger development strategy known as the One Belt, One Road.

Analysis 

The Indian Ocean island nation, a key battleground in the tussle for influence in South Asia between China and traditional regional power India, was due to receive the loan before the end of January, but this is now unlikely to be finalised until later this month, according to four officials.

R.H.S. Samaratunga, secretary to the finance ministry and treasury, said Colombo expected a response from the bank by February 20, 2019 meaning the loan may not be finalised for several more weeks. “They had asked a few questions and we have responded,” he told Reuters. “Then they said they will come back. But now they say they want to consult their head office.”

Sri Lanka is seeking the loan, which it said could be raised to $1 billion by the end of March, as it struggles to repay foreign debts after a political crisis delayed the government’s borrowing plan. The country is due to repay a record $5.9 billion this year, including $2.6 billion in the first three months.

“Usually if Chinese banks promise a loan, they give it quickly and on time,” a top government official who is aware of the negotiation told Reuters. The official said the negotiation, which was due to be closed in the last week of January, had dragged on after the Chinese bank had asked for “in-depth and lengthy data unlike in the previous negotiations” to compile the loan, and the finance ministry needed more than a week to compile the data.  “We can only start negotiations after Feb. 14 due to Chinese New Year holidays. Then we need to go through cabinet approval,” he told Reuters, asking not to be identified because he is not authorised to talk to the media. Another official said the government would negotiate on increasing the loan to $1 billion separately after receiving $300 million.

On January 17 2019, central bank chief said that the country would receive a $300 million loan from Bank of China before the end of January and another $700 million by end-March 2019. Investor confidence took a hit when President Maithripala Sirisena abruptly sacked Prime Minister Ranil Wickremesinghe in October 2018, replaced him with pro-China former president Mahinda Rajapaksa and dissolved parliament.

Sri Lanka’s top court then ruled the dissolution of parliament was illegal and Wickremesinghe was reinstated in December 2018, but the seven-week-long crisis has strained state finances.

A series of credit rating downgrades during the crisis has made it harder for Sri Lanka to tap international capital markets.

Assessment 

Our assessment is that Sri Lanka maybe be reconsidering the loan granted by the Bank of China after the looking at the massive debt burden. We believe that Sri Lanka is following Malaysia’s example and revaluating Chinese investments and Chinese debts in the country.