China’s Influence Grows in Sri Lanka with Promises of Debt Restructuring

Chinese Premier Li Qiang and Sri Lankan Prime Minister Dinesh Gunawardena are seen attending a welcoming ceremony ahead of their meeting at the Great Hall of the People in Beijing on the 26th. Photo credit: State-run China Central Television (CCTV).

According to diplomatic sources in Beijing on the 27th, Chinese Premier Li Qiang reportedly expressed a proactive stance on economic support, as expected during his meeting with Sri Lankan Prime Minister Dinesh Gunawardena at the Great Hall of the People in Beijing the day before. This stance seems to align with his request for special attention to the relationship between his country and India.

Sri Lanka, a representative impoverished Southeast Asian country, has a difficult economic situation. It is estimated to owe China alone $4.2 billion (5.8 trillion won) by the end of 2023. The country even ran out of foreign exchange reserves to pay for essential imports in 2022, making it impossible to repay its total external debt of $46 billion. It was inevitable for the country to declare bankruptcy.

Amid this, Prime Minister Gunawardena visited Beijing. China’s supportive stance was not surprising. For Sri Lanka, which has nothing more to lose, it was only natural to openly expect support. As expected, both prime ministers reached a consensus.

How China will specifically support Sri Lanka’s debt restructuring is unknown. However, some predictions can be made. First, an extension of the repayment deadline for the country’s bonds seems likely. Lowering the interest rate is also a possible scenario.

Even more drastic support is not out of the question. For instance, considering debt relief for some of the debt could be an option. Low-interest loans needed to repay debt owed to countries other than China can also be expected. While this may seem like a debt snowball for Sri Lanka, it would allow the government to breathe easier while putting out the fire.

Sri Lanka, too, cannot avoid playing the card of quid pro quo for the support. For example, under the guise of receiving support, Sri Lanka could guarantee broader Chinese participation in developing Colombo International Airport and Hambantota Port. In this case, Sri Lanka must accept the fate of becoming more dependent on Chinese capital. Although this may be a national tragedy, it seems there is no other way from the perspective of an impoverished country.