Credit line

Sri Lanka in talks with China for $2.5 billion line of credit and loan

COLOMBO (Reuters) – China is considering offering a $1.5 billion credit facility to Sri Lanka and a decision is expected soon, a senior Chinese official said on Monday, as part of efforts to help the nation island in the midst of its worst economic crisis in decades.

Chinese Ambassador to Sri Lanka Qi Zhenhong told reporters that the two sides were also discussing a separate loan of up to $1 billion that the Sri Lankan government had requested.

He added that the South Asian nation was offered a $500 million loan from the China Development Bank on March 18.

Sri Lanka must repay about $4 billion in debt this year, including a $1 billion international sovereign bond maturing in July. But its reserves fell to $2.31 billion at the end of February, down about 70% from two years ago.

The country is also struggling to pay for imports of essentials such as fuel and medicine and enforcing nationwide power cuts due to a lack of fuel for power generation.

“We believe our ultimate goal is to fix the problem, but there may be different ways to do that,” Qi said in response to questions about a possible Chinese loan restructuring.

China is Sri Lanka’s fourth largest lender, behind international financial markets, the Asian Development Bank (AfDB) and Japan.

Over the past decade, China has loaned Sri Lanka more than $5 billion to build highways, ports, an airport and a coal-fired power station. But critics say the funds were used for low-return white elephant projects, which China has denied.

President Gotabaya Rajapaksa asked China to help restructure debt repayments when he met Chinese Foreign Minister Wang Yi in January, but China has yet to respond to the request.

Reimbursements to China are estimated at between $400 million and $500 million, a finance ministry source told Reuters.

Rajapaksa said last week that Sri Lanka will work with the International Monetary Fund to help resolve the country’s economic crisis, with formal talks due to begin in mid-April.

Before the pandemic, China was Sri Lanka’s main source of tourists and the island imports more goods from China than from any other country.

Sri Lanka is a key part of China’s Belt and Road Initiative (BRI), a long-term plan to fund and build infrastructure linking China to the rest of the world, but others, including the United States, States have called it a “debt trap” for smaller nations.