Sunday Times 2
Who creates debt traps — Lenders or borrowers?
View(s):Moneylenders down the ages have been the most loved at the time of lending money and the most unpopular, condemned and vilified when the time comes to pay. This happened long before Shakespeare dramatised and vilified them in the Merchant of Venice and it happens now in media ads at the time of borrowing with the vilifying coming in news bulletins at payback times.
Despite world superpowers and even regional powers turning out to be moneylenders, their karma has been the vacillation between adoration and vilification like that of petty money lenders.
China has been Sri Lanka’s time-trusted friend since the days the Korean War ended and more so when the ‘War’ against separatist Tamil terrorists began. Human rights activists and those who armed and weaponised the separatist and made them terrorists were successful in thwarting other nations even selling arms to Lanka’s defence forces to fight the terrorists. The countries that provided arms were China in the main, Pakistan and Israel. Had China not provided arms at that time, the course that Lanka’s history would have taken may not have been to an independent, demcratic Sri Lanka.
Lanka is now in a financial and economic crisis of its own creation and China, it is alleged, has not been providing sufficient assurances to the IMF for approval for the Extended Fund Facility (EFF) of $2.9 billion asked for by Lanka.
On January 19 China’s Export-Import (Exim) Bank provided Sri Lanka with a letter saying that the bank is going to promote an extension of debt service due in 2022 and 2023. A Reuters report said that it implied that ‘Lanka will not have to pay the principal and interest due to the Exim Bank’s loans during the above period so as to help relieve Lanka’s short-term debt repayment pressure’.
By the end of 2020, Sri Lanka owed the Exim Bank US$ 2.83 billion or 3.56 percent of the country’s external debt. In total Sri Lanka owed Chinese lenders US$ 7.4 billion by the end of 2022, according to China’s calculations.
The bank will support Sri Lanka in its application to the IMF Extended Fund Facility to help relieve liquidity strain, the EXIM letter said.
But whether this letter from the EXIM Bank will trigger off the much sought-after EFF is in doubt at the time of writing this column. There has been no response from the Lanka government or the IMF.
The question arises whether China is holding back the full assurances required by the IMF for the grant of the loan or there are other reasons for it with so many foreign powers being involved in the issue.
It has run into the rivalry between the two regional powers: China and India. Relations between China and the Gotabaya regime flagged towards the end of the latter’s faltering regime because of a lack of foresight and decisions tainted with corruption. China was not treated as a superpower and was even accused of sending contaminated compost fertiliser. And Ranil Wickremesinghe who was appointed premier and later elected the president by the Gotabaya government would not certainly have been China’s favourite for leadership of Lanka. His role in suspending the operation of the Colombo Port City construction soon after Wickremesinghe became the premier and de facto leader of the Yahapalanaya government will not be forgotten.
These factors could be causes for China allegedly pulling its punches for Lanka at the IMF. On the other hand, Wickremesinghe is a known pro-American, supporter of the Western alliance and has developed very strong ties with India — China’s rival power in South Asia.
Thus, if China relaxes on the hold it has on the release of the IMF loan facility providing an opportunity for the pro-Indian, pro-Western leader and the government supporting him a chance to restore financial stability and stabilise himself politically for another run for the presidency, would it be in the interests of China or India, Chinese strategists may be wondering.
All this, we have to confess, is pure speculation. The Chinese Communist Party policy is not to have alliances with political parties or leaders but with a country and its people, it will be said. But the Chinese political experience in Lanka shows its positive preference to a particular political party and a particular family.
Recent news reports spoke of countries comprising the Paris Aid Club making assurances to the IMF on repayment of loans of Sri Lanka without the required degree of expression of China’s support and the American Treasury Secretary Janet Yeltsin visiting India this week to focus on ‘Unlocking debt restructuring for distressed countries’.
A ‘Debt roundtable focus on broad restructuring hurdles’ has been organised by the IMF, the World Bank, and India (Leader of the G-20 this year) followed by an ‘in person meeting’ on Feb 25 on the sidelines of the G-20 meeting in Bengaluru. Reuters reported six countries, including Sri Lanka, that had requested debt restructuring have been invited.
Aid was a major instrument of American foreign policy from the 1950s till the 1970s and tapered off towards the end of the Cold War by the end of the 1990s. Bilateral aid by other affluent countries too ceased to be, save for special projects. The IMF, the World Bank, and other international lending institutions assisted countries in need with limited finances. The United States stepping in to help countries unable to meet their commitments comes as a surprise but is welcome.
The African countries caught up in these ‘debt traps’ are those that have borrowed from China for massive development projects while China gained access to their natural resources for Chinese industries. In Asia, too, Chinese assistance is linked to its Belt and Road initiatives, and strategically placed countries like Lanka had received massive financial assistance which they are unable to pay back in the present global economic conditions.
Western nations and their media are alleging that China had left these underdeveloped nations in ‘Debt Traps’
Whether these Debt Traps were sprung by China with intent is much in doubt because the leaders of governments that received these massive amounts of Chinese finance had made investments in projects not so much for immediate economic development but for themselves, their cronies, and for winning elections. Sri Lanka is such an example. With development assistance from the West drying up, underdeveloped countries cannot resist the lure of
Chinese assistance.
Every money lender has its own objective and China wants to develop and gain influence, perhaps control, of strategic locations in their drive westwards in their Belt and Road Initiative much to the alarm of the West.
America, and its allies including India, see danger in the Chinese drive to the West on land and sea routes. Hence this sudden interest in ‘Unlocking Debt Restructuring’ may not be entirely altruistic.
What would the plight of poor Asian and African countries be if the flow of Chinese development assistance ceases?
Moneylenders from days of yore had debt traps for defaulters of loans. Hence the advice of our forefathers: Neither a lender nor borrower be. But that is impossible these days when existence is not possible without a credit card.