Top China Diplomat to Visit Sri Lanka as Forex Crisis Deepens

(Bloomberg) -- Chinese Foreign Minister Wang Yi will have an opportunity to help out Sri Lanka when he visits this weekend as the island nation searches for funds to rebuild foreign exchange reserves and repay debt amid ballooning import bills.

Wang’s visit comes as Beijing seeks to balance U.S. and Indian influence in the Indo-Pacific region during a pivotal political year in China. He may offer more grants while in the capital Colombo, according to a Sri Lankan government official who asked not to be identified. The ministries of finance and foreign affairs didn’t officially respond to questions on the matter. 

Chinese loans to Sri Lanka have been a contentious political topic over the past decade, with the country becoming an oft-cited example of debt diplomacy in President Xi Jinping’s Belt and Road Initiative -- an allegation Beijing has refuted. In particular, Sri Lankan politicians came under scrutiny for a port in southern Hambantota that lost money and was eventually sold to a state-owned Chinese firm in a much-criticized debt-to-equity swap on a 99-year lease.

Still, Sri Lanka currently needs cash, and its leaders have sought to balance ties between major powers to get funds. The country’s finances have nosedived since the pandemic grounded airplanes and shuttered its tourism industry, a major source of foreign exchange earnings. The situation has been exacerbated by looming debt repayments that Fitch Ratings put at $6.9 billion this year. Citigroup has flagged the risk of a “future potentially disorderly default.”

The central bank has allocated the required foreign currency to repay $500 million of bonds maturing Jan. 18, Governor Ajith Nivard Cabraal said in a tweet Wednesday. The nation has another $1 billion of dollar notes due July.

With rising import bills for fuel, machinery and food eating into foreign exchange reserves, half a dozen cabinet ministers have begun to speak favorably in the press of going to the International Monetary Fund for assistance over the past month. 

But it’s unclear if the Rajapaksa family, which holds power in Sri Lanka and is seen as close to Beijing, supports turning to the U.S.-based global body. Finance Minister Basil Rajapaksa on Monday said the government hasn’t made a decision to approach the IMF, and unveiled a relief package valued at more than $1 billion to calm public anger over the surging prices of food and medical items. He also said no new taxes were planned. 

Sri Lanka’s President Gotabaya Rajapaksa and his brother Prime Minister Mahinda Rajapaksa have turned to China for loans and assistance to build Sri Lanka’s infrastructure since the civil war ended in 2009. The country also maintains a deep-seated reluctance to seek help from the IMF again as it will invariably involve austerity measures. 

In late December, Sri Lanka tapped a $1.5 billion currency swap with China that was offered last year to build up its reserves to more than $3 billion.

Sri Lanka has sought to balance its reliance on China by negotiating a $1.9 billion economic aid package with India last month. While the deal is yet to be finalized, the government in Colombo has agreed to officially lease to Indian Oil Corp. part of an oil tank farm near Trincomalee port in the northeast that New Delhi considers strategic in national security terms.

India had earlier been concerned about China’s involvement with Hambantota port, fearing that Beijing would take it over for future military use.  

Sri Lanka has been able to “keep an equal distance” even as South Asian countries are forced to choose sides after “certain countries” launched an Indo-Pacific strategy that targeted China, Hu Shisheng, a senior research fellow at the China Institutes of Contemporary International Relations, told the Shanghai Observer on Tuesday.

Hu, whose research group is affiliated with China’s Ministry of State Security, said China will need to consolidate and develop ties with countries that are “China’s base for foreign policy” in order to “break up the anti-China network.”

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With assistance from Bloomberg