Chinese Foreign Minister Wang Yi is seeking to advance China’s ambitious “One Belt One Road” initiative in Sri Lanka as the island nation seeks help from Beijing as it tries to escape the foreign exchange and debt crisis
On Saturday, Wang arrived in Sri Lanka from the Maldives as the last stop of his multi-city trip. He also traveled to Eritrea, Kenya and Comoros in Africa.
In Sri Lanka, Wang Yi was scheduled to meet with President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa. Subsequently, Wang Qishan and Prime Minister Rajapaksa will deliver speeches at the Port City of Colombo, a reclaimed island invested and developed by China.
This diplomatic visit comes at a time when Sri Lanka is facing one of the worst economic crises in its history. Its foreign exchange reserves have fallen to around US$1.6 billion, which is only enough for imports for a few weeks. It will also assume more than US$7 billion in foreign debt obligations in 2022, including repaying US$500 million in bonds in January and US$1 billion in bonds in July.
Part of the reason for the decline in foreign exchange reserves is that China’s loan infrastructure does not generate revenue. In addition to an extensive road network, China has also loaned to build a seaport and airport in the southern area of Hambantota.
According to data from the Central Bank, China’s current total loans to Sri Lanka are approximately US$3.38 billion, excluding loans to state-owned enterprises, which are accounted for separately.
“Technically speaking, we can now claim that we are bankrupt,” said Muttukrishna Sarvananthan, lead researcher at the Point Pedro Development Institute. “When your foreign exchange reserves lose money, it means that you are technically bankrupt.”
This situation makes families face severe shortages. People lined up to buy necessities such as milk powder, gas, and kerosene. Prices have risen sharply, and the Central Bank stated that the inflation rate rose from 9.9% in November to 12.1% at the end of December. During the same period, the food inflation rate rose to more than 22%.
Due to currency shortages, importers cannot clear goods containing essentials, and manufacturers cannot purchase raw materials from overseas.
After the government ordered the forced exchange of foreign currencies and controlled the exchange rate, the remittances of the diaspora also declined.
The downgrade of rating agencies caused Sri Lanka to lose most of its borrowing capacity. In December last year, Fitch Ratings pointed out that the possibility of credit default has increased.
The central bank added 1.5 billion US dollars worth of renminbi currency swaps to its reserves, but economists disagree on whether it can become part of foreign exchange reserves.
Wang Yi’s trip also has regional significance. As Sri Lanka’s closest neighbors, China and India are vying for influence on the island.
Political analyst Langa Karansuriya said: “We can see that Sri Lanka provides support for a potential rescue plan between India and China.”
“India delayed for a while, while China tried to manipulate the situation as much as possible,” he added.
Since the end of the civil war in 2009, India has been vigilant about China’s increase in investment and loans in Sri Lanka. India considers Sri Lanka to be part of its influence. China considers Sri Lanka to be an important part of its “One Belt One Road” global infrastructure initiative.
Kalansooriya said that after Sri Lanka was recently nervous about a batch of fertilizers allegedly containing harmful bacteria and commercial agreements with China’s rivals, the United States and India, Wang Yi may also be seeking to resolve relations with Sri Lanka.
Karan Suriya said that China is unlikely to help Sri Lanka get rid of the economic crisis.
“They will look for more business opportunities and fish in the troubled waters of the country’s economic downturn,” he said.