China gives a green signal to support Sri Lanka come out of its financial debt crisis by agreeing to restructure its loans. This move of China will help the bankrupt island nation in passing the final obstacle to a much-awaited International Monetary Fund bailout.
IMF plans to provide a $ 2.9 billion bailout for Sri Lanka after China’s assurance to support the nation by restructuring its debt. The IMF board will consider the loan on March 20 as China becomes the final and largest creditor nation. This rescue package from the IMF will help Ranil Wickremesinghe’s government to repair the financial status of the country.
The Sri Lankan government owes $ 14 billion in bilateral debt to foreign governments, out of which 52% is held by China. Japan (19.5%) and India (12%) are next on the list for the biggest creditors along with a host of others popularly referred to as “Paris Club” creditor nations.
Sri Lanka’s aberrant economic crises have led the country towards acute food, fuel, and medicine shortage and a huge inflation rate. Its economic crisis reached its peak in July 2022 when thousands of protesters stormed into then-president Gotabaya Rajapaksa’s official residence, since then the situation of the country in all aspects has tended to have deteriorated.
Ranil Wickremesinghe’s government has imposed high taxes and ended various types of subsidies (e.g.- energy subsidies) in an attempt to cope with the nation’s finances and also to meet the terms pressed upon in the IMF deal.
PARIS CLUB
The Paris Club is an informal group consisting of western creditor nations. In 1956, Argentina agreed to meet its public creditors in Paris and this is where the Paris Club grew.
It is often seen regarding itself as a forum where creditors meet to solve payment difficulties faced by debtor nations. Their focus objective is to find sustainable debt-relief solutions for countries that default to repay their bilateral loans.
Members:
1) Australia
2) Austria
3) Belgium
4) Brazil
5) Canada
6) Denmark
7) Finland
8) France
9) Germany
10) Ireland
11) Israel
12) Italy
13) Japan
14) Netherlands
15) Norway
16) Russia
17) South Korea
18) Spain
19) Sweden
20) Switzerland
21) UK
22) US
The Paris club’s importance can be observed parallelly with growing China’s dominance as the largest bilateral lender in the world.
SRI LANKA’S ECONOMIC CRISES
Since 2019, the island country has been experiencing the worst economic turbulence since its independence from Britain in 1948.
The exceptional rise in inflation and depletion of foreign exchange reserves has threatened the country’s financial stability and generated a state of fear among its inhabitants.
The Sri Lankan crises are the result of a series of events, including tax cuts, money creation, a statewide policy to move towards organic farming, the 2019 Easter bombings, and the effects of the COVID-19 epidemic, all of which have accumulated to bring the country to its current plight.
The international community sees the loans made by the Exim Bank of China to Sri Lanka to build the Hambantota International Port and the Mattala Rajapaksa International Airport and these places not turning profitable for the country have further pushed the country into the debt trap.
The Central Bank of Sri Lanka tried to stabilize the value of the Sri Lankan rupee by continuing to print currency in high quantities, in addition to this the strict exchange control kept pushing the market value of the native currency further lower.
The tourism sector contributed to 1/10th of the country’s GDP, this sector was hard hit after the 2019 bombings and then the covid-19 pandemic further prevented the recovery.
The agricultural crises arising due to the shift towards organic farming added further to the downfall of the economy. Sri Lanka has been self-sufficient in rice production for a very long time, but in 2021 President Rajapaksha announced a change in agriculture pattern. Due to this shift, the nation saw a drop in tea production and from the ban on fertilizers, the Lankan economy witnessed a loss of around $ 425 million and a drop of 20% in the production of rice.
Due to this self-sufficient approach, it had to import rice from other countries. Farming under the organic program turned out to be expensive and producing even half of the before yield also became difficult for the farmers.
Further, the Russia-Ukraine war added to the worsening condition of the country as Russia was the second biggest market for Sri Lankan tea exports. The tourism sector also relied largely upon tourists from these two countries.
Under these circumstances, the IMF’s fund will act as a saving stick for the island country with a hope for a fast recovery rate.