China offers $42.4 million in aid to crisis-stricken Sri Lanka

New Delhi is keen for Colombo to diminish its economic ties with Beijing that have grown over the past decade under the Rajapaksas and former Prime Minister Ranil Wickremesinghe.

According to Mr. Umesh Moramudali, who teaches economics at the University of Colombo and studies the dynamics of Sri Lanka’s public debt: “There is a clear change in China’s approach towards Sri Lanka, in meaning that she promised aid but waited until Sri Lanka had a clear debt restructuring plan.

“Or maybe it was a reaction to Sri Lanka’s recent close relationship with India.”

While India has provided essential aid, economists say Sri Lanka’s urgent need for dollars has left it with no choice but to seek help from China.

“It is important to get help from China, especially through the type of term funding facilities it has offered in the past, to bolster foreign exchange reserves,” Moramudali said.

Lines of credit give fuel or food on credit and do not increase foreign exchange reserves. Term loan facilities, on the other hand, will give Sri Lanka the dollars it needs to freely spend on imports from any country.

Chinese loans account for about 20% of Sri Lanka’s total external debt, including $1.2 billion in term loan funding from the China Development Bank in 2020 and 2021.

Mr Moramudali said: “Claims by Western and Indian media that the Chinese debt trap is the main cause of Sri Lanka’s economic crisis are exaggerated.

Sri Lanka’s biggest debt burden comes from sovereign bonds, or international market borrowings, which account for 40% of its foreign lending. These bonds also account for half of Sri Lanka’s international debt repayments each year.

Sri Lanka cannot afford to ignore help from a trading partner to repay maturing bonds and improve foreign exchange reserves, Moramudali added.

By Rohini Mohan

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