China hesitates on bailing out Sri Lanka, Pakistan as debt soars

OVER the past few years, the US has accused China of using "debt diplomacy" to make developing nations across the world more dependent on Beijing. Yet the cases of Sri Lanka and Pakistan - both friends of China facing dire financial situations as inflation soars - show that President Xi Jinping's government is becoming more reluctant to pull out the chequebook. China still hasn't made good on a pledge to re-issue loans totalling US$4 billion that Pakistan repaid in late March, and it hasn't responded to Sri Lanka's pleas for US$2.5 billion in credit support.

While China has pledged to help both countries, the more cautious approach reflects both a refining of Xi's signature Belt and Road Initiative as well as a hesitancy to be seen interfering in messy domestic political situations. Pakistan got a new prime minister on Monday after parliament booted out Imran Khan, and Sri Lanka's leader is facing pressure from protesters to step down.

"Beijing has for the past couple of years been rethinking its external lending because their banks realised they were carrying a lot of debt with countries whose prospects of paying back were quite limited," said Raffaello Pantucci, a senior fellow at the S. Rajaratnam School of International Studies at Nanyang Technological University. "This came on top of a tightening economic situation at home which also required a lot of spending, so there was less appetite to just throw money around wantonly."

China is facing its own economic troubles, with lockdowns to contain the country's worst Covid outbreak since early 2020 shutting down the technology and financial hubs of Shanghai and Shenzhen. Analysts warn the official growth target of a 5.5 per cent is now in jeopardy. China has become the world's largest government creditor over the past decade, with its state-owned policy banks lending more to developing countries than the International Monetary Fund or the World Bank in recent years.

Sri Lanka's top diplomat in Beijing said he was "very confident" China will come through with credit support.

China's role in helping to resolve ongoing crises in South Asia may be limited despite its status as a major creditor. A Shanghai-based scholar who researches China's overseas lending said new credit lines are harder to approve as authorities emphasise risk management at financial institutions.

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Xi had highlighted the importance of a more cautious approach at a high-level Belt and Road symposium in November.

Earlier this month, Jin Liqun, president of the China-backed Asian Infrastructure Investment Bank, encouraged Sri Lanka to turn to the IMF for help.

China's development banks are acting to preserve returns and it "would be difficult for them to easily accede to Sri Lanka's requests for deferrals", said Matthew Mingey, a senior analyst at Rhodium Group's China Macro & Policy team who researches economic diplomacy.

"Credit conditions back in China aren't making things any easier for them," he added. "Ultimately, Sri Lanka needs the IMF." Sri Lanka said on Tuesday it would expedite talks with the IMF after it halted payments on foreign debt to preserve dollars for essential food and fuel imports.

Pakistan's new government also plans to work with the IMF to stabilise the economy, according to Miftah Ismail, a former finance minister and a senior ruling party leader.

China's ability to assist either country with a balance-of-payments crisis is limited, particularly as Beijing's financial assistance is almost always tied to specific projects, said Muttukrishna Sarvananthan, principle researcher at the Point Pedro Institute of Development in Sri Lanka. China's policy of non-interference in internal affairs prevents it from offering the type of advice needed for countries to emerge out of a financial crisis, he added.

"Even the IMF appears to be moving very slowly - if not abandoning - the requests of both Pakistan and Sri Lanka for their assistance," Sarvananthan said. "Which sane bilateral donor country or international financial institution would pour money into sinking ships in both Pakistan and Sri Lanka?" BLOOMBERG