ECONOMYYNEXT- International Monetary Fund Chief Kristalina Georgieva has called on China to speed up restructuring of debt in Sri Lanka and Zambia following a meeting with the leaders of the country.
“We had a very fruitful exchange, both on the G20 Common Framework and on some specific cases,” she said in a statement after the meeting.
“We need to build on the momentum of the agreement on Chad’s debt treatment and accelerate and finalize the debt treatments for Zambia and Sri Lanka, which would allow for disbursements from the IMF and multilateral development banks.”
Sri Lanka is discussions with the Export Import Bank of China as the lead lender to the island, State Minister Shehan Semasinghe told parliament.
China has informed Sri Lanka that they will also hold bilateral discussions with the IMF and World Bank he said.
China has been asking questions from Sri Lanka and lenders were trying to assess the impact on credits to other countries as well as the domestic economy, he said.
China is a top lender to Sri Lanka along with Japan, the Asian Development Bank and Japan.
“China will implement the G20’s Debt Service Suspension Initiative (DSSI) in all respects, and work withn relevant G20 members to formulate and participate in a fair and equitable debt-restructuring plan,” Prime Minister Li Keqiang was quoted as saying in an official statement.
The DSSI, started to help the poorest countries during Coronavirus crisis saw around 40 countries applying.
Some of China’s infrastructure loans have also been questioned for lack of proper feasibility, though a coal plant is generally acknowledged to be best investment the country has made since the 1980s and is enough to cover many since.
But China gave several so-called ‘cover up loans’ to Sri Lanka which was not linked to infrastructure or economic reforms when the country ran into forex shortages under ‘flexible inflation targeting/output gap targeting’ compounding borrowings from sovereign bond investors.
Sri Lanka calls such monetary instability linked borrowings ‘bridging finance’.
The World Bank and Asian Development Bank or Japan does not give such ‘bridging finance’ or budget support loans without reforms to expand economic activities.
Sri Lanka central government net debt (after deducting foreign reserves) which was 17 billion US dollars after almost 65 years of foreign borrowings shot up to 32 billion US dollars over 7 years of extreme monetary instability. Meanwhile foreign reserves became negative.
Resorting foreign borrowings to meet foreign repayments comes from a Mercantilist fallacy known as the ‘transfer problem’, analysts have said.
Policy makers believe that a current account surplus is magically required to make foreign repayments and not higher interest rates to curtail domestic investments and consumption which make resources available to meet such payments which will in turn reduce the imports and any current account deficit. (Colombo/Dec10/2022)