ECONOMYNEXT – China is considering a $2.5 billion loan and buyer’s credit to Sri Lanka’s Beijing Ambassador to Colombo, Qi Zhenhong, as the country scrambles to repay foreign debt amid a foreign exchange crisis sparked by money being printed was used to enforce low interest rates in addition to tax cuts.
“We are considering $2.5 billion-$1 billion loan, $1.5 billion buyer credit,” Ambassador Qi told reporters in Colombo.
A buyer credit is typically a loan made by the Exim Bank of China to purchase goods and services from the People’s Republic and has historically been used to fund infrastructure on the island.
Sri Lankan President Gotabaya Rajapaksa last year called for China to restructure debt as the country was downgraded to CC by rating agencies and foreign exchange reserves were running out as money was printed.
“Sri Lanka and China have entered into close negotiations on bilateral relations,” Ambassador Qi told reporters in response to a question on President Rajapaksa’s debt restructuring request.
“As a true friend, we will support Sri Lanka. Sri Lanka has a reputation for paying its debts.”
From around 2018, China has granted budget support loans to Sri Lanka in order not only to repay due installments.
China is also urging Sri Lanka to resume talks on a free trade deal needed for investments to work.
Sri Lanka has said it is expecting a new loan from China to repay maturing debts after President Rajapaksa asked for a debt restructuring.
Ambassador Qi said Sri Lanka has asked China for a $1.5 billion facility. China also gave the central bank a US$1.5 billion renminbi loan that was drawn down to boost reserves.
Sri Lanka also receives US$500 million in oil credits from India and another US$1 billion loan has been signed with India to import food and medicines.
Multilateral lenders, including the Asian Development Bank and the World Bank, stopped providing budget support loans a few years ago because of the country’s reluctance to undertake pro-growth reforms and only extended project loans.
The IMF said Sri Lanka’s debt was unsustainable amid a foreign exchange crisis sparked by money printing to keep interest rates low.
Sri Lanka has also asked the International Monetary Fund for support and floated the rupee, but economists have called for a rate hike to make the float work, end money printing and curb domestic lending. (Colombo/March 21, 2022)