Sri Lanka is now in talks with China for financial assistance to tackle the current economic woes and a balance of payment crisis emerging over the massive debt situation.
Wide budget deficits running up to over Rs. 800 billion this year and more than Rs.1 trillion in the next year are likely to require at least partial foreign financing, which is extremely difficult to gain amidst the COVID-19 crisis, economic experts said.
Sri Lanka is expecting a $700 million loan from China and Samurai and Panda bonds to boost dollar inflows in October 2020.
Acting Ambassador for China Hu Wei met with State Minister of Finance Ajith Nivard Cabraal and the Central Bank Governor Professor W.D. Lakshman at the Finance Ministry on Saturday17.
Discussions were held on the next steps to be taken in relation to the financial instruments to be implemented as identified at the recent high-level talks between Yang Jiechi, the Politburo Member and Director of the Central Foreign Affairs Commission of the Chinese Communist Party, and President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa.
On October 8th a high level Chinese delegation arrived in Sri Lanka, and was allowed into the country without even PCR testing (let alone quarantining).
On October 11th, China announced it was bestowing a $90 million grant on Sri Lanka.
On October 13th, the Lankan cabinet approved the awarding of a $20.96 million contract to a Chinese joint venture to construct a wastewater treatment plant in Wellawatte.
During his meeting with the Chinese delegation, President Gotabaya Rajapksa requested help in reducing Lanka’s massive trade deficit with China ($3.8 billion in 2019).
In response, the Chinese seemed to have placed the old idea of Free Trade Agreement (FTA) on the agenda.
Under this backdrop, Sri Lanka and China on Wednesday (14) signed a supplementary agreement on a Memorandum of Understanding (MoU) on water research and technology cooperation, aimed at providing clean drinking water to several areas of the island country, a statement from the Chinese Embassy to Sri Lanka said.
Discussions are underway with China Development Bank to obtain a loan facility of US$ 700 million, state minister of finance Ajith Nivard Cabraal has said.
The aid was extended while Sri Lanka was in discussion with China to obtain a loan of USD 1.2 billion. China has already provided USD 500 million out of this amount to Sri Lanka.
The government will use the US$500 million loan from the China Development Bank (CDB) for budgetary support, Money, Capital Markets and State Enterprise Reforms Minister Ajith Nivard Cabraal revealed.
He said this would be in addition to the US$500 million loan obtained earlier this year and that the agreement for the fresh loan would be signed between the Finance Ministry and the CDB.
The next ISB repayment of $1 billion is due in July 2021, said State Minister of Finance, Ajith Nivard Cabraal adding that the government will be able to raise necessary funds from the domestic and foreign markets.
The Finance Ministry plans to raise Rs.1.5 trillion by issuing treasury bonds and bills, Rs.100 billion via Sri Lanka Development bonds, Rs.75 billion in Foreign Currency Banking Units (FCBU) while seeking financial assistance from international lending agencies such as the World Bank and the ADB.
The Government has no intention of seeking funds through the International Monetary Fund’s (IMF) Rapid Financing Instrument (RFI), as debt servicing has been effectively managed, Mr. Cabraal added.