No selling of souls in Sri Lanka: Karunanayake defends China policy
Sri Lanka’s economy is slowly being wrestled back into shape, following the disastrous era of scattergun borrowing and spending that embodied the previous government. But, the country’s finance minister tells Global Markets, much remains to be done in order to clear a huge backlog of debt and toxic loans out of the financial system, and get the economy moving again
Sri Lanka is determined to continue to borrow from China despite racking up a debt pile worth 75% of its economy, the country’s finance minister told GlobalMarkets.
Ravi Karunanayake said Sri Lanka would continue to do business with China. “Sure [Chinese FDI] concerns us — but China has deep pockets, and it’s better to have some investment than no investment at all,” he said.
“So long as we don’t sell our soul we will be fine. The problem with the capital raised by the [previous government] is that it was [channelled into] questionable investments, meaning that we ended up with unused convention centres and under-utilised ports.”
Official government data places Sri Lanka’s total debts at $64.9bn — of which $8bn is owed to China — and the nation’s debt-to-GDP ratio at 75%, more than Germany and on a par with Hungary and Canada. The same data reveal that more than 95% of all government revenue is being used to cut the colossal debt pile.
Many of its financial problems stem from the decision by former premier Mahinda Rajapaska to borrower heavily from Chinese development banks — and use that cash to build vast infrastructure projects, many of which, including new airports and highways in the south of the island, remain unfinished, or largely unused.
Other challenges lie ahead, many of which are out of the country’s control, most notably the pace at which the US Federal Reserve plans to hike interest rates in the months and years ahead. “We are at the mercy of the Fed,” Karunanayake said. Once the fiscal discipline the minister yearns for is in place, the government will, he adds, “focus on boosting inward foreign direct investment, which has eluded us for too long.”
One major project kickstarted by the previous government remains on-track: the $1.4bn Colombo International Financial City. Karunanayake said the zone would in time become an offshore financial centre built on UK financial laws and norms, catering to the global aspirations of India’s currency, the rupee.
That ambition is interwoven with the hope that India, its giant sovereign neighbour, overseen by pro-business premier Narendra Modi, will transform South Asia into a genuine commercial, financial and industrial region in the years to come. “We are certainly looking at positioning ourselves with India,” the finance minister said. “We want to take advantage of regional trade, rather than, as has been the case until now, focusing on trade with Southeast Asia.”
Sri Lanka has been busy in the international lending market this year, finalising its largest ever syndicated loan, and borrowing $1.5bn from the IMF. Karunanayake refused to rule out a return to the markets in the months ahead, but said the focus in the short term would remain “above all, on instilling fiscal discipline. We are looking at the bond market and the loans market, but before we go back to the market, we want financial stabilisation to take place.”