Calling China!

Maithri-Ranil Government via Finance Ministry makes first application for concessionary loan from China EXIM Bank for consultancy expense of Southern Expressway Extension project following its launch early this month

The new Government has applied for the first preferential loan from China last week, reinforcing reliance on the Asian super power for socio-economic development financing, which now stands at an estimated $ 5 billion, much of it secured under the previous Rajapaksa regime.

The Daily FT learns that China EXIM Bank has received the preferential loan application letter from Sri Lanka’s Ministry of Finance on consultancy expense of the Southern Expressway Extension Project.

“This is the first time that the new Government has applied for preferential loan from China EXIM Bank after the 8 January president election,” a source said.

Though such a request is a standard practice when seeking concessionary financing, what was significant was it being the first under the President Maithripala Sirisena-Premier Ranil Wickremesinghe Government. 

However, the request comes after the launch of the work on the China funded Matara-Hambantota extension of the Southern Highway in early this month.  

Preferential loans from China EXIM Bank carry an interest rate of only 2% with 20 year repayment time and a five-year grace period.

According to the Finance Ministry, in the first five months of this year, China has disbursed $ 98.7 million of financing for development projects, ranking number one, followed by Japan at $ 84 million and India trailing at $ 36.7 million.

Chinese financing already made and committed is estimated at $ 5 billion, largely procured during former President Mahinda Rajapaksa’s tenure and widely criticised by the interim UNP Government when it was in the Opposition. 

The Chinese Embassy however has maintained that in the past decade, at the request of Sri Lanka, preferential loans provided by Chinese EXIM Bank have been beneficial for Sri Lanka.

These loans have  helped Sri Lanka build over 1,500 kilometres of all kinds of roads, the sole coal-fired power plant generating 50% of electricity for the country, several key water supply facilities, etc. These projects and funding have not only helped lay the foundation for Sri Lanka but also upgraded people’s livelihood.

China early this month welcomed the commencement of work on the Matara-Hambantota segment of the Southern Expressway by the new Government. 

“We appreciate the efforts of both President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe and other Ministers to make the launch of the construction work on the Matara-Hambantota segment of the Southern Expressway a success,” a spokesman for the Chinese Embassy said.

For this project China EXIM Bank extended a $ 1.7 billion preferential loan with an interest rate of only 2%. Repayment is spread over 20 years with a five-year grace period as per the agreement signed in 2014.

The embassy said this 90-kilometre expressway was funded by China EXIM bank and would create 15,000 jobs for Sri Lankan youth and shorten the travel time from three hours to 40 minutes. It will be completed in three-and-a-half years. 

The fresh request last week for a new concessionary loan comes amidst reported moves by the Government to tap funding sources outside China.

Last week a Reuters report quoting unnamed Government officials said Sri Lanka is seeking cheaper funding sources to replace billions of dollars in debt from Chinese banks as the six-month-old Government distances itself from Beijing weeks before a general election.

It said Sirisena had suspended most Chinese-backed infrastructure projects started under Rajapaksa, who has denied allegations of corruption and overpricing in contract awards.

Sirisena’s reformist coalition is in talks to replace about 70% of the more than $ 5 billion in debt from Chinese lenders with loans at cheaper interest rates and longer durations from other sources, two Finance Ministry officials involved in the negotiations said.

The move follows failed Government efforts to negotiate more favourable terms with the Chinese banks, and the Finance Ministry is looking at options, including borrowing from lenders in Japan, the United States or Europe, a top Government official has told Reuters. “Money is there at a cheaper rate and for a longer tenure,” he said.

Reuters said that according to a senior Finance Ministry official, Finance Minister Ravi Karunanayake has been exploring ways Sri Lanka could borrow at lower rates after concluding from a trip to Japan this month that loans could be obtained for between 0.1% and 0.2%.

The report said Sri Lanka’s Government has 16 ongoing Chinese-backed infrastructure projects which depend on $ 4 billion in borrowing from the Export-Import Bank of China (Exim Bank) and the rates of interest are between 2.5% and 9%, Finance Ministry data shows.

Chinese officials have said the rates of interest are only 2%. But the data shows there are extra fees that add to cost the servicing the loan.

The Chinese Embassy in Colombo said it was unaware of the Government’s move to replace the loans, Reuters reported.