Photo courtesy of The Island
The US Under Secretary of State for Political Affairs, Victoria Nuland, visited Sri Lanka last week and dominating her agenda with the government was the core issue of restructuring the government’s foreign debt, on which it has defaulted, which stands at the heart of recovery from bankruptcy. Unusually plain speaking for a diplomat, Ms. Nuland was blunt about the main factor obstructing the receipt of an IMF structural adjustment facility and that was the reluctance of the Chinese Government, through their state owned financial entities, to seriously explore the issue of a debt write down. Ms. Nuland stated that “What China has offered so far is not enough …..We need to see credible and specific assurances that Chine will meet the IMF standard of debt relief”.
That credible standard of debt relief did not seem to be forthcoming from the Chinese. After months of being scarce in the process of debt renegotiation, the Chinese finally made an offer that was at best completely underwhelming, namely, a two year moratorium on the repayment of debt. Compare that with what the Western aid donor countries in the Paris Club were discussing about offering, which was a ten year moratorium on debt repayment, including some debt write down. In the words of Ms. Nuland, this commitment was very clear. “We, the United States, are prepared to do our part. Our Paris Club partners are prepared to do their part. India has made strong commitments that it will provide the credible assurances the IMF is looking for,” she said.
Predictably the Chinese were quick to defend their not very generous offer as the epitome of reasonableness and were sharp in their rebuttal. Gone are the days when Chinese diplomats were known for bowing a lot and speaking softly. Now they come out swinging, as it were, at the slightest hint of criticism and accordingly the Chinese Foreign Ministry spokesperson, Ms. Nao Ning, responded saying “Rather than jabbing fingers at China’s close cooperation with Sri Lanka, the US might as well show some sincerity and actually do something to help Sri Lanka weather through the current difficulties”, conveniently forgetting that the US had for several years offered half a billion dollar in grant (yes, a non-repayable) funding from the Millennium Challenge Cooperation (MCC) that the Rajapaksa Administration, for reasons best known to itself, chose to turn down giving a whole new meaning to the phrase, “looking a gift horse in the mouth” and then making the nation falling flat on its face.
The Chinese debt from the belt and road initiative
Dealing with the Chinese debt is a serious challenge for Sri Lanka and an even bigger challenge for China. For Sri Lanka, it is currently the main sticking point in securing an IMF facility that would be the start of reversing the steep contraction (negative growth) of the economy. For the Chinese, the issue of distress loans from its much vaunted belt and road programme could not have come at a worse time. The Chinese economy has significantly slowed down and with it the Chinese face their own issues of the asset quality in their banking system. There is also now much more vocal criticism of the debt piled on the vulnerable economies of developing countries for the construction of projects of dubious utility and economic value at inflated prices. Sri Lanka has become a poster boy (case study) of corrupt and despotic local rulers who indebted their countries to the point of bankruptcy. The issue becomes how responsible is the lender for this fate of the borrower? Undoubtedly the Rajapaksas and their political cohorts in the SLPP should bear the responsibility for the decision to rake up expensive and extensive foreign debts. But rather like the classic tort law case studies of the liability for a drunk driving accident of a bar tender who keeps plying his obviously intoxicated customer with ever more alcohol knowing that the customer was a danger to himself and others, the Chinese showed at best a reckless disregard for the economic vulnerabilities of its borrowers, especially Rajapaksa led Sri Lanka or, as their detractors claim, a cynical method of creating pliant client states.
The Chinese aspiration to being a global power requires China to deal with international issues and especially international global financial issues in a mainstream manner. China, like other great powers, does not want to end up being isolated in their foreign affairs. Mostly due to some adroit work by some of Sri Lanka’s other friends, namely India and the Paris Club of creditor nations, the Chinese find themselves in the unenviable position where all others are ready for a pragmatic and generous approach to debt restructuring while for them the very mention of it is unthinkable, a likely unviable long term position.
Coincidently Sri Lanka’s international sovereign bond holders, through their lawyers White and Chase LLP, issued a statement and wrote to the IMF Managing Director expressing their willingness to engage in good faith in debt negotiations. However for them, the Paris Club and all other creditors, is the cardinal principal of equal treatment that early movers who make concessions would not receive less favorable terms than the hold outs. So the real price of Chinese reluctance for serious debt renegotiations is that it prevents even other creditors from doing so. The Wickremesinghe-Rajapaksa administration has no answers to this dilemma and the other crucial requirements of economic reforms.