A lesson from Sri Lanka on dealing with mounting Chinese debt

Sri Lanka could be offering lessons to countries battling mounting debt from China and other lenders. And Colombo decided that to survive longer, it seems dealing in more business with creditors can help.

This week, President Ranil Wickremesinghe met a delegation from Chinese state-owned China Petroleum & Chemical Corporation (Sinopec) to discuss the construction of an oil distribution hub and refinery in Hambantota, the Port Beijing helped build some years back worth $1.5 billion.

A statement from the Sri Lankan presidency said Sinopec is prepared to fully fund the construction of the refinery, a month after Colombo invited expressions of interest to build a refinery at Hambantota port.

“President Ranil Wickremesinghe said that the government has taken a principled decision to expand the distribution of fuel and Hambantota has been identified as a primary energy hub,” the presidency of Ski Lanka indicated in a statement on Monday.

“Sinopec has also pledged to invest in a refinery in Hambantota.”

The deal didn’t come out of the blue, however. Sri Lanka had been in the chokehold of debt, defaulting on $46 billion of credit from foreign lenders, most of which is owed to private bondholders with a bilateral debt of just about $14 billion. China is the biggest bilateral creditor in Sri Lanka, owed about 52 percent.

Yet Sri Lanka needed Beijing’s help to stay afloat: It needed China to agree to a restructuring of its loans in Colombo for the International Monetary Fund (IMF) to provide emergency funding to Sri Lanka. That came on March 7 when the IMF indicated it had received word from Beijing agreeing to restructure, and hence pave way for financing to Sri Lanka to help the island nation battle economic turmoil.

In a speech to Parliament, President Wickremesinghe said Beijing had now agreed to restructure its debt to delay repayment periods and that that had opened avenues for access to $2.9 billion in funds to be released within the month from IMF.

"We have done our part, I hope the IMF will do theirs," he said in a special address to lawmakers.

China’s financial assurances didn’t come for free, however. Beijing has ridiculed other lenders whom it says have caused Sri Lanka the bigger problem.

“The (China Exim) Bank also noted that it will support Sri Lanka in its loan application to the IMF and continuously call on commercial creditors (including the International Sovereign Bondholders) to provide debt treatment in an equally comparable manner, and encourage multilateral creditors to do their utmost to make corresponding contributions,” said Mao Ning, China’s Foreign Ministry Spokesperson at a press briefing last week.

“China’s action fully demonstrates its sincerity and efforts to support Sri Lanka in achieving debt sustainability. China will continue to support relevant financial institutions in actively working out the debt treatment.”

Just under a week after the gesture, Sinopec was in talks for a refinery that will be situated in the same vicinity as the Hambantota Port which cost $1.5 billion but has since been acquired on lease by Beijing to run it for 99 years.

There are geopolitical connotations to the deal. The US and neighbours India, for instance, had been raising concerns of potential influence in the Indian Ocean region of Asia. A port and a refinery mean crude imports to china may be refined before onward delivery to Beijing. US sees that business as more ‘debt trap’ for Asian countries such as Sri Lanka and Myanmar where Beijing has built recent infrastructure on credit.

Last month, Sri Lankan government encouraged India to set up an energy hub in Sri Lanka, granting the state-run India Oil Corporation (IOC) the opportunity to compete. IOC signed a deal with Sri Lanka’s Ceylon Petroleum Corporation (CPC) to develop what the Economic Times indicated as an “oil tank farm” in Trincomalee, east of Sri Lanka.

These may be competitors but Sri Lanka shows the developing world that you may have easier days ahead if creditors are happy with the business. The question is whether it is sustainable.