COLOMBO, Sri Lanka (AP) – Chinese Foreign Minister Wang Yi was in Sri Lanka on Sunday to try to push forward China’s ambitious Belt and Road initiative, as the island nation looked to Beijing for support. aid as she tried to save herself from a foreign currency and debt crisis.
Wang arrived in Sri Lanka from the Maldives on Saturday on the last leg of a multi-city trip that also took him to Eritrea, Kenya and the Comoros in Africa.
In Sri Lanka, Wang was due to meet with President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa. Later, Wang and Prime Minister Rajapaksa were to speak at the port city of Colombo, a reclaimed island developed with Chinese investment.
The diplomatic visit comes as Sri Lanka faces one of its worst economic crises, with foreign reserves reduced to around $ 1.6 billion, barely enough for a few weeks of imports. It also has external debt obligations exceeding $ 7 billion in 2022, including the repayment of bonds worth $ 500 million in January and $ 1 billion in July.
The decline in foreign exchange reserves is partly due to infrastructure built with Chinese loans that does not generate income. China loaned money to build a seaport and an airport in the southern district of Hambantota, in addition to an extensive network of roads.
Figures from the Central Bank show that current Chinese loans to Sri Lanka total around $ 3.38 billion, not including loans to state-owned enterprises, which are accounted for separately.
“Technically, we can pretend we’re bankrupt now,” said Muttukrishna Sarvananthan, senior researcher at the Point Pedro Development Institute. “When you have foreign exchange reserves in the red, that means you are technically bankrupt. ”
The situation has left households facing severe shortages. People line up to buy essentials like powdered milk, cooking gas and kerosene. Prices have risen sharply and the Central Bank indicates that the inflation rate reached 12.1% at the end of December against 9.9% in November. Food inflation has risen to over 22% over the same period.
Due to a shortage of foreign exchange, importers are unable to clear their cargo containing essential products through customs, and manufacturers cannot purchase raw materials from abroad.
Remittances from expatriates also fell after the government ordered mandatory foreign currency conversion and exchange rate controls.
The downgrades of rating agencies have cost Sri Lanka much of its borrowing power. In December, Fitch Ratings noted an increased likelihood of credit default.
The Central Bank has added a $ 1.5 billion Chinese currency exchange to reserves, but economists disagree on whether this can be part of foreign exchange reserves or not.
Wang’s visit is also of regional significance, as China and India, Sri Lanka’s closest neighbor, compete for influence on the island.
“We can see Sri Lanka standing between India and China for a possible bailout,” political analyst Ranga Kalansooriya said.
“India has been dragging its feet for some time as China tries to manipulate the situation as much as possible,” he added.
India is wary of the increase in Chinese investments and loans to Sri Lanka since the end of the civil war in 2009. India considers Sri Lanka to be part of its territory of influence. China sees Sri Lanka as an essential link in its Belt and Road global infrastructure initiative.
Kalansooriya says Wang may also seek to smooth relations with Sri Lanka after they were recently strained over a shipment of fertilizers that allegedly contained harmful bacteria and trade deals that were signed with rivals in the country. China, the United States and India.
Kalansooriya said China was unlikely to lift Sri Lanka out of its economic crisis.
“They will be looking for more business opportunities, fishing in the troubled waters of the country’s economic slump,” he said.