-By Political editor
(Lanka-e-News -17.April.2025, 11.00 PM) When Sri Lanka defaulted on its foreign debt in 2022—marking the first such instance in its post-independence history—it found itself teetering on the edge of economic collapse. The streets of Colombo, once bustling with middle-class commerce, began to echo with unrest, despair, and a sense of abandonment. Supermarkets ran out of essentials, fuel lines stretched for kilometers, and hospitals struggled to secure life-saving medicines.
In that darkness, the only sliver of hope lay in international debt restructuring, a precondition for any International Monetary Fund (IMF) bailout. But there was a critical caveat: all major bilateral lenders had to come on board—and none was more crucial than China.
Fast forward to October 2023, and China quietly became the first bilateral lender to agree to a formal debt restructuring deal with Sri Lanka. But what remained underreported, if not entirely ignored, was the scale of sacrifice Beijing made: a whopping $7 billion in nominal losses—with a total economic cost of over $12 billion, when factoring in opportunity costs, interest losses, and the effective write-downs in future repayments.
This wasn't just a generous gesture. It was an unprecedented move that arguably saved Sri Lanka from becoming the "next Lebanon."
When Sri Lanka declared a sovereign default, its total external debt stood at over $51 billion. Roughly $7.4 billion of this was owed to China, mostly to state-owned policy banks like the Export-Import Bank of China and the China Development Bank. These were not soft loans—many carried interest rates that far exceeded those of multilateral institutions like the World Bank or IMF.
Yet, without China’s participation in the debt restructuring effort, no progress could be made. The IMF had set a non-negotiable condition: all bilateral creditors, especially the largest ones, must agree to comparable restructuring terms. Without Chinese participation, the IMF program—worth $2.9 billion over four years—was dead in the water.
And with that, so was Sri Lanka’s chance of recovery.
In March 2024, Chinese Ambassador to Sri Lanka Qi Zhenhong confirmed what had long been whispered behind closed doors: China had agreed to a “substantial haircut” on Sri Lankan debt, amounting to at least $7 billion in nominal terms. In real terms, analysts estimate the cost to China—including interest waivers, principal write-downs, and delays in repayment—exceeds $12 billion.
This makes it the single largest loss any nation has voluntarily accepted for Sri Lanka’s economic stabilization.
What makes this gesture even more extraordinary is that China never sought to weaponize its aid. Unlike many Western donors who often tie aid to political or structural reforms—or expect preferential access to markets or military facilities—China made no such demands. No land leases, no port concessions, no defense pacts. Just a handshake and an understanding.
So why did China agree to a deal that guarantees them an economic loss of $12 billion? Was it merely goodwill? Or were there deeper strategic calculations?
Economists and regional analysts point to a few key motivations:
Geopolitical Stability: A collapsing Sri Lanka would not only have created a humanitarian crisis but also a strategic vacuum in the Indian Ocean, an area where both China and India seek influence. A Lebanon-style implosion would have led to failed governance, mass emigration, and possibly military or political intervention from regional rivals.
Preserving Belt and Road (BRI) Credibility: Sri Lanka is a flagship BRI country, home to key Chinese investments like the Hambantota Port and Colombo Port City. A default without restructuring would have labeled China a debt trapper and seriously undermined BRI’s credibility.
Long-Term Diplomatic Investment: Sri Lanka and China share diplomatic ties that stretch back to the 1952 Rubber-Rice Pact, when China was still isolated and Sri Lanka defied global norms to trade with them. It was payback, but not in the crude transactional sense—it was a demonstration of historical loyalty.
Soft Power and Image Management: At a time when China faces increasing scrutiny in the global south for its lending practices, this move allowed Beijing to project itself as a benevolent superpower, willing to take a hit for the greater good.
Had China refused to restructure its loans, Sri Lanka’s IMF program would have stalled indefinitely. That would have had several devastating consequences:
No Access to Foreign Credit: Without IMF backing, no international bank or institution would lend to Sri Lanka.
Crashing Currency: The Sri Lankan Rupee, already battered, would have spiraled into hyperinflation.
Import Paralysis: With no credit lines or foreign reserves, imports of fuel, medicine, and food would have stopped.
Welfare Collapse: Over 50% of Sri Lanka’s population depends on government subsidies or services. A state unable to pay salaries or buy essentials would have triggered state failure.
Mass Emigration and Brain Drain: Economic collapse would have driven tens of thousands to flee the country, many illegally. The social costs would be incalculable.
Despite the scale of China's gesture, both local and international media were curiously quiet. One would expect headlines like “China Writes Off $12 Billion to Save Sri Lanka” or “Colombo Owes Its Survival to Beijing.” Instead, the coverage was either muted or cynical, often wrapped in suspicion of ulterior motives.
Was it the media’s discomfort with China’s global role? Or an unwillingness to acknowledge that Western-led institutions were not the only players capable of altruism?
Perhaps it was both.
The Sri Lankan government, too, missed a diplomatic opportunity. A formal vote of thanks in Parliament, a presidential address recognizing China’s support, or even public gratitude from the Central Bank would have sent a strong message—not just to Beijing, but to all future lenders and investors: that Sri Lanka honors its friends.
Instead, officialdom remained largely silent, save for a few routine press statements and vague mentions in budget speeches. It was a moment for statesmanship. It was squandered.
While China's restructuring paved the way, Sri Lanka still faces a long road to recovery. Talks with private bondholders—who hold over $14 billion in International Sovereign Bonds (ISBs)—are ongoing. These entities are far less generous than nation-states and have already demanded GDP-linked bonds and equity-like instruments in return for haircuts.
Then there’s India and the Paris Club members, who have shown willingness but remain cautious. Unlike China, they’ve asked for concessions, including policy reforms, governance overhauls, and greater transparency.
And yet, without China’s initial participation, none of this would have even started.
Sri Lanka owes its economic lifeline not just to the IMF or the Central Bank’s reforms, but to a decision taken in Beijing, likely behind closed doors, with little fanfare and no press conference.
It’s not fashionable these days to praise China in diplomatic circles. But facts don’t care for fashion. And the fact is: Sri Lanka was saved by an act of quiet generosity that cost another nation $12 billion.
Sri Lankans, as a proud people with long memories, may one day look back at this moment not with suspicion or political filters, but with gratitude.
Because sometimes, global diplomacy isn’t about press releases or photo-ops. Sometimes, it’s about doing the right thing, even when nobody says thank you.
-By Political editor
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by (2025-04-17 17:30:54)
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