Debt-Ridden Sri Lanka Asks China to Revise $1.5 Billion Swap Deal

Sri Lanka's new Prime Minister Ranil Wickremesinghe (C) visits a Buddhist temple after his swearing in ceremony in Colombo on May 12, 2022. Ishara S. Kodikara/AFP via Getty Images

Sri Lanka has requested that China amend the terms of a $1.5 billion yuan-denominated swap facility so that it can be used to fund essential imports, Prime Minister Ranil Wickremesinghe said on June 7.

The swap agreement, signed by the Central Bank of Sri Lanka in March 2021, stipulates that the fund can only be used provided that Sri Lanka has enough foreign reserves to last three months.

“We have not had foreign exchange reserves for three months since the loan was taken. Our former officials took loans to deceive the country,” Wickremesinghe said in a speech in Parliament.

“We will not be debt-free under that condition. We have requested the Chinese government to consider removing that condition from the agreement that has been signed with them.”

Sri Lanka is on the verge of bankruptcy, with its foreign exchange reserves plummeting by 70 percent over the past two years, leaving it struggling to pay for essential imports.

Wickremesinghe said the country requires at least $6 billion to stay afloat over the next six months. The United Nations has arranged for a worldwide public appeal on June 9 to provide $48 million in aid over a four-month period.

The government has also sought help from India and Japan. Wickremesinghe said relations between Sri Lanka and Japan had broken down over the suspension of certain projects, about which Sri Lanka failed to inform Japan.

He urged the parliamentary committee on public finance to investigate the suspension of projects granted by Japan and India, claiming that the projects had been put on hold or suspended for no reason.

Wickremesinghe also called on the International Monetary Fund (IMF) to hold a conference to help unite lending partners. Sri Lanka is currently in talks with the IMF for a $3 billion loan package, Reuters reported.

“Holding such a conference under the leadership of India, China, and Japan will be a great strength to our country. China and Japan have different credit approaches. It is our hope that some consensus on lending approaches can be reached through such a conference,” he said.

About 10 percent of Sri Lanka’s $51 billion external debt is owed to China. Sri Lanka had requested help from China to restructure its debt obligations and $2.5 billion in financial support. In May, the Sri Lankan government said Beijing extended a total aid package of 500 million yuan ($76 million).

Sri Lanka is also a key part of the Chinese Belt and Road Initiative, which other countries have criticized as a “debt trap” for smaller nations. Several of its infrastructure projects funded by foreign investments have failed to generate revenue, plunging the country into debt.

In December 2017, the Sri Lankan government leased the key port of Hambantota to China for 99 years to convert its owed loans of $1.4 billion into equity, a move that has sparked thousands to rally in protest.