{"id":37678,"date":"2023-10-13T07:53:24","date_gmt":"2023-10-13T02:23:24","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=37678"},"modified":"2025-04-23T00:36:17","modified_gmt":"2025-04-22T19:06:17","slug":"why-china-has-assisted-sri-lanka-over-debt-worth-dollar-42-billion","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/why-china-has-assisted-sri-lanka-over-debt-worth-dollar-42-billion\/","title":{"rendered":"Why China has assisted Sri Lanka over debt worth $4.2 billion?"},"content":{"rendered":"<h2>What\u2019s in today\u2019s article?<\/h2>\n<ul>\n<li>Why in News?<\/li>\n<li>Why does Sri Lanka Need Assistance with its Foreign Debt?<\/li>\n<li>How has Sri Lanka Planned to Tide Over its Economic Crisis?<\/li>\n<li>What are the Concerns over Sri Lanka\u2019s Debt Negotiations?<\/li>\n<li>What are the Implications of the Recent Sri Lanka-China Deal?<\/li>\n<\/ul>\n<h2>Why in News?<\/h2>\n<ul>\n<li>More than a year after Sri Lanka plunged into an economic crisis, it has reached an agreement with the Export-Import (EXIM) Bank of China to cover about $4.2 billion of its outstanding debt.<\/li>\n<li>The indicative terms agreed will provide the necessary fiscal space for Sri Lanka to implement its ambitious reform agenda.<\/li>\n<\/ul>\n<h2>Why does Sri Lanka Need Assistance with its Foreign Debt?<\/h2>\n<ul>\n<li><strong>In (April) 2022<\/strong>, Sri Lanka declared that it had failed to repay its debt of more than $83 billion, with more than half of it owed to foreign creditors. It also decided to approach the International Monetary Fund (IMF).<\/li>\n<li><strong>The crisis was years in the making<\/strong> and many factors were responsible, such as the &#8211;\n<ul>\n<li>President Gotabaya Rajapaksa\u2019s government pushed through the<strong> largest tax cuts in Sri Lankan history,<\/strong> as part of the 2019 elections campaign, impacting the government\u2019s revenue sources.<\/li>\n<li>Another blow was dealt by the<strong> coronavirus pandemic<\/strong>, which hit the tourism industry. The war in Ukraine further contributed to <strong>fuel shortages<\/strong>.<\/li>\n<li><strong>Skyrocketing inflation<\/strong> saw many Sri Lankans take to the streets to protest against the government and the then-President Rajapaksa resigned.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2>How has Sri Lanka Planned to Tide Over its Economic Crisis?<\/h2>\n<ul>\n<li>To increase revenues and signal better governance, it will be important for Sri Lanka <strong>to strengthen tax administration, remove tax exemptions and actively eliminate tax evasion.<\/strong><\/li>\n<li>In the interim, the then President<strong> had sought help from China and India<\/strong>, particularly assistance on fuel from the latter.<\/li>\n<li><strong>A diesel shipment<\/strong> under a $500 million credit line was signed with <strong>India<\/strong>. Later, a $1 billion credit line for importing essentials, including food and medicine was also extended.<\/li>\n<li>In (September 2022), Sri Lanka qualified for an<strong> IMF Extended Fund Facility of $2.9 billion<\/strong>. Its first tranche of $330 million came through in (March) 2023.\n<ul>\n<li>However, the debt owed to other countries had to be managed through negotiations (called <strong>debt restructuring<\/strong>), for the IMF to extend its loan to Sri Lanka.<\/li>\n<li>Generally, debt restructuring can lead to reduced loan interest rates or an extension of its repayment date.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2>What are the Concerns over Sri Lanka\u2019s Debt Negotiations?<\/h2>\n<ul>\n<li>A debt restructuring agreement between Sri Lanka and countries such as Japan, India, and France were expected (in September 2023) <strong>but did not materialise<\/strong>.<\/li>\n<li><strong>Through the Paris Group<\/strong>, which includes countries like Japan and South Korea, there was <strong>an attempt from countries to bring China and India on board<\/strong> and negotiate as a whole &#8211; to make sure no nation gets preferential terms.<\/li>\n<li>Of the total bilateral debt Sri Lanka owes to foreign governments, <strong>China\u2019s share is the greatest<\/strong>, followed by Japan and India.<\/li>\n<li><strong>But China has largely gone for bilateral negotiations<\/strong> in the past, with confidential terms.<\/li>\n<li><strong>India has had two major concerns <\/strong>about joining a common platform that does not have China:\n<ul>\n<li>It leaves China to enter into its own custom-made bilateral agreement;<\/li>\n<li>The Sri Lankan side has indicated that this year&#8217;s emergency aid from India totalling $4 billion should be included in the restructuring, which New Delhi does not agree with.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2>What are the Implications of the Recent Sri Lanka-China Deal?<\/h2>\n<ul>\n<li>The agreement with China\u2019s EXIM Bank <strong>will assist Sri Lanka in getting past the first review of the IMF programme<\/strong> in the coming weeks and in securing the release of the 2nd IMF tranche of about $334 million.<\/li>\n<li><strong>For India<\/strong>, China\u2019s assistance to Sri Lanka will be seen as another means through which it is investing in deepening its ties with the island nation.\n<ul>\n<li>In recent years, Sri Lanka also joined the Chinese infrastructure financing project, <strong>the Belt and Road Initiative (BRI),<\/strong> which India opposes.<\/li>\n<li>As part of it, China funded the development of <strong>Hambantota <\/strong>port in southern Sri Lanka, which falls on the crucial trade routes between Southeast Asia, Africa and West Asia.<\/li>\n<li>It was taken over in <strong>2017 <\/strong>after Sri Lanka failed to pay for its costs. This has been termed \u2018<strong>debt-trap diplomacy<\/strong>\u2019 by many, as a means for China to assert itself and acquire overseas assets through its increased economic heft.<\/li>\n<\/ul>\n<\/li>\n<li><strong>India has concerns<\/strong> that China\u2019s increasing presence in its immediate neighbourhood <strong>could further embolden<\/strong> Chinese military presence, also potentially allowing them to conduct surveillance in the region.<\/li>\n<\/ul>\n<figure class=\"media\">\n<div data-oembed-url=\"https:\/\/www.youtube.com\/watch?v=fiAWTfQAD5o\">\n<div><iframe src=\"https:\/\/www.youtube.com\/embed\/fiAWTfQAD5o\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/div>\n<\/div>\n<\/figure>\n<hr \/>\n<h3>Q.1) What is the IMF&#8217;s Extended Fund Facility?<\/h3>\n<p>The Extended Fund Facility provides financial assistance to countries facing serious medium-term balance of payments problems because of structural weaknesses that require time to address.<\/p>\n<h3>Q.2) What do you mean by \u2018debt-trap diplomacy\u2019?<\/h3>\n<p>Debt-trap diplomacy entails providing projects\/loans with too challenging terms for borrowing states to pay back, ultimately forcing them to accept economic or political concessions.<\/p>\n<hr \/>\n<p><strong>Source: <\/strong><a href=\"https:\/\/indianexpress.com\/article\/explained\/explained-history\/italy-naik-yeshwant-ghadge-world-war-ii-8980197\/\" target=\"_blank\" rel=\"noopener noreferrer nofollow\">Why China has assisted Sri Lanka over debt worth $4.2 billion<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Sri Lanka has reached an agreement with the EXIM Bank of China to cover about $4.2 billion of its outstanding debt to implement its ambitious reform agenda.<\/p>\n","protected":false},"author":5,"featured_media":37679,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[],"class_list":{"0":"post-37678","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/37678","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=37678"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/37678\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/37679"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=37678"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=37678"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=37678"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}