Sri Lanka seeks US$2.2 billion from China as reserves shrink

COLOMBO: Sri Lanka is seeking $2.2 billion from Chinese banks, the government said on Thursday (Feb 25), in echoes of a borrowing binge more than a decade ago that resulted in the country having to give up a strategic port to China.

Money and capital markets minister Nivard Cabraal said the government was hopeful of finalising a US$1.5 billion swap facility with China’s central bank.

“Within the next two weeks we should be able to finalise it,” Cabraal told reporters in Colombo while maintaining that the funds would be used as a “buffer” to meet the government’s foreign currency needs.

Official figures show Sri Lanka’s foreign reserves plummeted to US$4.8 billion at the end of January, the lowest since September 2009 when they fell to US$4.2 billion.

Officials said Sri Lanka was also in talks with China Development Bank for a US$700 million loan that would include the equivalent of US$200 million being drawn in Chinese currency.

Under former president Mahinda Rajapaksa between 2005 and 2015, Colombo borrowed billions from China, accumulating a mountain of debt for expensive infrastructure projects.

This sparked Western and Indian concerns that the strategically located Indian Ocean nation was falling victim to a Chinese debt trap.

Mahinda Rajapaksa returned to power as prime minister in 2019 after his brother Gotabaya Rajapaksa was elected president.

Sri Lanka was forced to hand over its strategic Hambantota port on a 99-year lease to a Chinese company in 2017 after Colombo said it was unable to service the US$1.4 billion debt from Beijing used to build it.

READ: Commentary: Sri Lanka’s debt problem wasn’t made in China

Three top international rating agencies downgraded Sri Lanka’s creditworthiness late last year after raising doubts over Colombo’s ability to service its foreign debt.

The South Asian nation’s economy is reeling from the twin impacts of the deadly 2019 Easter bombings that killed 279 and devastated the tourism sector as well as the fallout from the COVID-19 pandemic.

Cabraal insisted on Thursday that Sri Lanka would maintain its record of repaying debt on time and said the credit downgrades by international agencies were “unwarranted”.

He said Sri Lanka had already repaid US$500 million this year out of its US$3.7 billion debt servicing commitment for the calendar year 2021.

He said the government imposed a ban on luxury imports and several other commodities in a bid to conserve foreign exchange so that the country could have sufficient foreign currency to repay its debt.

Sri Lanka’s economy contracted by a record 3.9 per cent last year.

However, Cabraal said economic activity was picking up and the country estimated foreign inflows of US$32 billion against outflows of US$27.6 billion this year, leaving a surplus of US$4.4 billion.

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