Sri Lanka hopes to conclude discussions with China “soon” on a $4 billion aid package, the country’s ambassador to Beijing told Nikkei Asia.

Ambassador Palitha Kohona said in an email that talks were progressing. “We hope that these discussions could be concluded soon, as a positive outcome would definitely assist Sri Lanka to reestablish confidence in the financial markets and recover from its unprecedented and dire financial circumstances.”

China has been a major creditor of Sri Lanka, though it remains a burning question exactly how much the latter owes the former. Since Sri Lanka plunged into a severe foreign exchange crisis this year and defaulted for the first time in May, Beijing has reportedly been reluctant to go along with debt restructuring.

But new Sri Lankan President Ranil Wickremesinghe, who was elected by parliament on July 20 after the resignation of much-criticized Gotabaya Rajapaksa, is looking to China again as he attempts to cement his grip and quell unrest.

Since early this week, police have been rounding up frontline demonstrators and leaders of the anti-government movement. A state of emergency is to remain in effect for another month after parliament approved it on Wednesday.

Persistent resentment and protests against the new government threaten to disrupt efforts to secure a long-awaited bailout from the International Monetary Fund. Wickremesinghe, in his previous role as prime minister, had expressed optimism in June that such a deal would be in place by the end of this month, but that now appears unlikely.

IMF Managing Director Kristalina Georgieva told Nikkei shortly before Wickremesinghe became president that the fund wanted to offer aid as quickly as possible and would work with any administration -- “as long as the next leader enjoys support and has the longevity to lead the country.”

In the meantime, Sri Lanka appears to be pinning hopes on the $4 billion aid package from China, which would include a $1.5 billion credit line and implementation of a $1.5 billion currency swap with Beijing.

Last Friday, the day after Wickremesinghe was sworn in, Chinese President Xi Jinping sent a congratulatory message and promised to “provide support and assistance to the best of my ability.”

Ambassador Kohona stressed that Sri Lanka had never been unable to meet its loan repayment obligations in the past. While protesters and many observers have accused the previous Rajapaksa government of economic mismanagement, the envoy said it was only an unexpected convergence of factors including the COVID-19 pandemic that led to the default.

“However, with the easing of the COVID situation and the return to constitutional governance, we hope to take our discussions with China toward positive conclusions in the near future,” he said.

Average Sri Lankans continue to deal with painful shortages of fuel, food and other essentials, as dwindling foreign reserves have left the country unable to import what it needs. The energy minister said this week that fuel imports must be restricted for the next 12 months, and that fuel would be available only through a quota system starting this month.

Kohona said he has also been holding discussions with large Chinese companies to encourage them to invest in Sri Lanka and bring in more foreign currency. His sales pitch notes that Sri Lanka’s Indian Ocean location puts it within easy air and sea access to promising markets, from Africa and the Middle East to India and Southeast Asia.

“A number of Chinese companies have already made commitments to invest in Sri Lanka and we are actively discussing potential investment options with others, including in steel, renewable energy, tire production, yacht building and infrastructure development,” the ambassador said.

He also said he expects that with a “return to normalcy,” investors in existing big-ticket projects like Colombo Port City and the Hambantota Port area will “proceed with their intended investment plans.” The Chinese government, he said, is “actively” encouraging companies to invest in Sri Lanka.

The ambassador rejected claims that Sri Lanka has fallen into a Chinese “debt trap,” arguing that only around 10% of external debt is owed to China, though some observers have questioned whether that number covers everything.

“Much more is owed to multilateral institutions like the World Bank and the Asian Development Bank,” he said. “Similarly, a considerable amount is owed to institutional investors, mainly from the West, including Wall Street. The interest rates charged by the Chinese lenders have also been favorable.”

Suggestions that Sri Lanka’s financial situation has been caused by the debts owed to China are “inaccurate and misplaced,” he said.

Kohona was also quick to deny that China had abandoned Sri Lanka while India stepped in with around $3.8 billion in financial assistance.

“India, also a long-standing friend, did in fact come to Sri Lanka’s assistance very early and promptly, and we are indeed grateful to India for what it has done,” he said. “But it is an unfair exaggeration to say that China deserted Sri Lanka during its time of need.” According to the ambassador, since 2021, China and Chinese banks have made available almost $1.2 billion worth of assistance in various forms.

Kohona pointed to China’s provision of a 500 million yuan ($74 million) emergency assistance package that included rice, medicines, fertilizer and fuel.

The ambassador suggested that over the longer term, exports to the lucrative Chinese market could help ensure a sustainable recovery. He said that Beijing was encouraging this as well, and that free trade talks were underway.

Not to be outdone, Indian Prime Minister Narendra Modi made it clear this week that his government also remains willing to help. “India will continue to be supportive of the request of the people of Sri Lanka for stability and economic recovery, through established democratic means, institutions and constitutional frameworks,” Modi said in a congratulatory message to Wickremesinghe on Monday.

Source: Nikkei Asia

--Agencies