China has Helped Sri Lanka over Debt of $4.2 Billion. What Could be the Reason?

Sri Lanka went into an economic crisis and it was after one year that it went into an agreement with the Export-Import (EXIM) Bank of China for the purpose of covering over $4.2 billion of its debt that is outstanding. This has been clarified by what the finance ministry said in a statement recently on October 11.

“The indicative terms agreed will provide the necessary fiscal space for Sri Lanka to implement its ambitious reform agenda,” said the statement by the finance ministry.

Not only China, but India is also a part of the negotiation process over the debt Sri Lanka owes. However, China remains the biggest bilateral creditor to the country. China has lent over $7 billion of the complete foreign debt of Sri Lanka, which is actually as high as $42 billion.

Let's understand the story bit by bit.

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The need for assistance with the foreign debt

In the year 2022, Sri Lanka announced that it had actually failed to pay back its debt of over $83 billion or more. It said that half of the debt is owed to foreign creditors. The country was also set to approach the International Monetary Fund in the month of April last year.

There was not one but many factors that were actually responsible for the crisis in the country. One of the reasons was the government of President Gotabaya Rajapaksa pushing through the most significant tax cuts in the history of the country which impacted the revenue sources of the government. The COVID-19 pandemic which shook the entire world was unkind to Sri Lanka as well, thereby adversely affecting its tourism industry. The pandemic, thus, was also a strong reason behind the crisis.

What made the situation worse was the Ukraine war which led to fuel shortages. As the inflation touched the sky, many Sri Lankans went to protests against the government. All these problematic situations and more led the President to resign in the month of July.

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What have been Sri Lanka's plans to combat the economic crisis?

President Rajapaksa sought aid from India and China to face the economic crisis. India has been helpful to Sri Lanka especially aid on fuel. With India, Sri Lanka signed a diesel shipment worth $500 million credit line. Not only this but a $1 billion credit line for the purpose of importing essentials such as medicine and food was also given by India.

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