China becomes wild card in Sri Lanka's debt crisis

China says its initiative to build ports and other infrastructure across Asia and Africa will boost trade. In a cautionary tale for borrowers, Sri Lanka's debt to Beijing threatens to hinder efforts to resolve a financial crisis so severe that the Indian Ocean nation cannot import food or gasoline.

The struggle of Sri Lanka is extreme, but it is indicative of conditions across dozens of countries from South Pacific islands through some of the poorer in Asia and Africa that have signed onto the Chinese President's Belt and Road Initiative. Poor countries' debt is rising, which could cause trouble.

There are 22 million people in Sri Lanka who are in dire straits. Food shortages, power cuts, and protests forced the prime minister to resign after foreign currency ran out. The debt to China, Japan and other foreign countries was not being paid.

Poor Asian countries welcome Chinese financing. According to the Asian Development Bank, the region needs to invest over a trillion dollars a year in infrastructure. Critics of the government's spending say Chinese-led projects cost too much or do too little for their economies.

The government of China has an outsize potential to disrupt a settlement, which is why China is third among Sri Lanka's creditor.

In talks with the International Monetary Fund, Beijing promised to play a positive role. China offered to lend more but was unwilling to join a process that could cut Sri Lanka's debt.

If China gives a concession to Sri Lanka, it will have to give the same concession to other borrowers, according to an economist.

If China tries to avoid debt cuts, that could cause problems for the International Monetary Fund and the private sector.

Aditi Mittal of Verisk Maplecroft said in an email that the lack of cooperation by Beijing would complicate the debt recovery journey.

The United States, Japan, the European Union and other governments lend on a smaller scale. Many Belt and Road countries don't have a legal framework for investment in infrastructure because they are deemed too risky.

Smaller crises have run into some governments. Truck drivers protested after their government imposed a fuel tax to pay for a Chinese-built railway.

Projects have been canceled or scaled back by others. The railway in Malaysia was too expensive. The high-speed railway was reworked after protests that too little work went to Thai companies.

Some debt has been restructured by China. Beijing agreed to forgive some interest and shorten the repayment of a $4 billion railway loan from Ethiopia. It added two more decades of interest charges.

Chinese officials say Belt and Road projects are not aid. Commercial terms are used for most lending. It's often secret.

Beijing, the biggest trading partner for all of its neighbors, is trying to expand its influence and undermine theirs, which is why Belt and Road rankles Washington, Moscow, Tokyo, New Delhi and other governments.

The opposition blames the leaders who built unrealistic projects that cannot pay for themselves while they failed to invest in economic development for the debt that Sri Lanka has with China.

Foreign loans built highways, airports and convention halls in the jungles which didn't give returns in foreign currency.

Critics say that a Chinese-built port in Hambantota is a prime example of official recklessness.

It was built despite the plan being rejected by an expert panel and paid for with Chinese loans.

The promoter said that Hambantota would ease the burden on the main port in Sri Lanka. It did not generate foreign revenue.

The port was rescued by Beijing by having a state-owned company buy a 99-year lease. There is land for an industrial park.

The official bungling of the deal gave a foreign government control over part of the country.

Chinese loans paid for the airport. Few airlines use it.

Beijing is accused of using a debt trap to gain influence over the country.

Legislators said that they had no capacity to repay.

Rajashepak said that they must convince China to forgo some of the loans.

Sri Lanka is in talks with the International Monetary Fund and has suspended payment to Chinese banks. Roughly half of the government's debt is to private sector bond investors.

A restructuring agreement with China or Japan would be a positive signal for a recovery.

In a written response to questions, the Chinese foreign ministry said that Beijing is ready to play a positive role in easing the debt burden.

The ministry said that China is willing to support financial institutions to negotiate.

In April, Ranil Wickremesinghe told Republic TV that China offered a $1 billion loan instead of reducing Sri Lanka's debt. The government would be able to make payments, but the total owed would rise.

On May 12th, the new prime minister was named, after the previous prime minister resigned.

The Chinese Ambassador told reporters April 25 that negotiations with the International Monetary Fund would interfere with Beijing's loan offer. The International Monetary Fund requires borrowers to work out a deal with their debts.

The London Club of government lenders is a forum for negotiating debt cuts.

The governor of the central bank warned that China and other creditor must accept the same terms.

It is not right to treat one creditor differently to others.

Even if Beijing doesn't budge, Sri Lanka can't afford to lose its biggest potential lender and investor.

He said that Sri Lanka was not in a position to say no.

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Pathi reported from New Delhi and McDonald from Beijing.