Amidst the Delta scare and Labour strife, will China become Sri Lanka’s new IMF?

by Rajan Philips

The government, rather the country, is in the grip of three mutually aggravating crises – involving public health, people’s lives and the economy. And every one of them has gotten critical. Covid-19 has morphed or mutated into a dreadful Delta scare. Even the suddenly impressive vaccine rollout is being outrun by surges in infections and deaths. If vaccination is picking up four paces, Delta is overtaking by eight paces and more. That is the reality.

Last Thursday, two major hospitals, the Ratnapura General Hospital and the Karapitiya Teaching Hospital, “declared emergency,” apparently a rare occurrence in Sri Lanka’s medical history. The emergency situation is due to increases in Covid-19 patients, technically bordering on “a situation of Mass Casualty Incidents” and warranting emergency responses, according to the Deputy Director-general of Health Services, Dr. Hemantha Herath. Hospitals in the Western Province are also getting filled up even as they are running short of oxygen supply. For some time now, the Lady Ridgeway Hospital in Colombo has been struggling to cope with the influx of children infected by Covid-19.

The second crisis is the unrest among working people. This is more than a labour or trade union problem. The widespread unrest and ubiquitous protests are not part of the usual political muscle flexing. They are desperate signs of vast sections of people finding it impossible to get on with life. No one is suggesting that the government should creatively find ways to immediately restore normal economic life in the country. But everyone, except those who are close to the perks and fringes of power, is aghast that government leaders are pretending that they are in control of everything and that normality is just round the corner. Nothing can be more distant from the truth. And the truth is about the third crisis, which is the economic crisis. What the people are helplessly experiencing is the symptom of an economy that is in severe crisis. There is no point trying to hide it or to pretend otherwise.

Just like the crises, the government’s responses to them are also mutually aggravating. On the pandemic front, the President and the government have so failed to put together a permanent team of experts who will publicly tell the government and the people the unvarnished truth about the Covid-19 situation in Sri Lanka, and offer their advice on what everyone should be doing to control and contain the Delta spread as much as possible.

Friday’s news reports announced that President Gotabaya Rajapaksa convened a special meeting to discuss the current COVID-19 situation. Head of the COVID-19 task force Army Commander General Shavendra Silva, minsters, Director General of Health Services and several other experts reportedly took part in the meeting. Nothing much came out of it. The point is this is more political ad-hocism, and not a substitute for putting in charge a permanent body of experts.

The government after initially downplaying the severity of the pandemic crisis and prematurely celebrating victory over the virus, is now trying to use Covid-19 as reason to stop public protesting. At the same time, the government is ignoring universal medical opinion that has been pleading for the continuation of Covid-19 restrictions. People can see through when the government uses medical opinion as grounds for arresting protesters, but will not listen to medical opinion that calls for generally restrictive measures to contain the spread of Covid-19. People can also see that protesters are not flouting Covid-19 precautions and they are not ignoring social distance requirements.

People know that they are experiencing the same helplessness and frustrations that are driving protesters to picket lines. They expect empathy from the government. And they want the government to honestly engage with the protesters and establish a consensual framework for work and welfare in the middle of an out-of-control pandemic with no quick ending in sight.

The government’s economic management and messaging have been as bad as, or even worse than, its responses to the pandemic and to the people’s plights. The country is facing its worst economic crisis since independence in terms of self-inflicted revenue losses and diminishing foreign reserves, a falling rupee and mounting debt (domestic and foreign), and onerous debt repayment obligations. The people are going through the worst spell of severe hardships in living memory. In the midst of them all the government is stubbornly talking about some alternative way of economic management. What is being touted as the alternative way is not the outcome of any collective thought process and any co-ordinated implementation plan. Instead, it is a catch-all phrase to give context to knee jerk and uncoordinated responses to different problems as and when they arise.

Chinese alternative to IMF?

The abrupt switch from chemical to organic fertilizers in agriculture by presidential fiat is by far the most glaring case in point. A second, politically less dramatic but economically more consequential instance is the government’s stubborn reluctance to seek IMF help to tide over the current balance of payment (BOP) crisis. In vaccine parlance, this reluctance is a severe form of IMF hesitancy. No one knows if this hesitancy is backed up by any hope of getting a full BOP bailout from Beijing. Even less is known if the government has approached Beijing for a fully-fledged BOP help beyond periodical swaps. Known lesser still is what would be China’s response.

It would be rationally worthwhile for the government to at least consider Chinese help as an alternative to seeking IMF help. Although rational, it is not necessarily a prudent choice. The gossipy question is if there is any thinking at all within the government along these lines, assuming of course that thinking is going on in government circles. Equally, there has been no serious speculation among government critics that the government might be looking to China as a potential alternative to the IMF.

Ever since China started providing development assistance to emerging economies and developing countries, global watchers have become interested in China’s role as a counter to western hegemony over development assistance through the agencies of the World Bank (providing development assistance) and the IMF (securing financial stability and lending to tide over balance of payment difficulties). Although China’s development assistance (through the China Development Bank and the China Export-Import Bank) is more comparable to the activities of the World Bank, in recent years there has been growing “journalistic interest” in viewing Beijing as an alternative source to the IMF for providing financial support to developing countries.

James Sundquist, a Yale University doctoral researcher, has summed up this interest in posing the question: “Does Chinese finance in the form of loans and currency swaps substitute for assistance from the International Monetary Fund (IMF), reducing that insti­tution’s influence and opening more ‘policy space’ for developing countries?” His study based on data for 104 countries between 2001 and 2017 would seem to suggest that mostly countries that are “able to compensate China in means other than cash” are likely to consider turning to China to avoid the IMF. Non-cash compensation can be “repayment-in-kind with natural resource exports and geo­political concessions.”

Sundquist selected four countries “for closer examination” to test his hypothesis. Sri Lanka is one of them. Angola, Zimbabwe and Mongolia are the other three. Angola is a resource rich country that received Chinese bailout and avoided the IMF. Zimbabwe, though nominally resource rich is practically resource poor because of its neglected and atrophied extraction infrastructure. China has not lent money to Zimbabwe because it is not credit worthy. Mongolia is resource-rich and China has been keen on offering assistance, but the Mongolian government opted to go along with IMF financial assistance and stabilization program. The apparent reason was to avoid too much bilateral reliance on China.

Sri Lanka is seen as a country that has received both development assistance and BOP assistance from China without possessing “resource guarantees,” because of its geopolitical assets. It would seem Sundquist’s research period preceded the Sri Lankan government’s current IMF hesitancy and did not quite assess the potential of Beijing becoming a total or the primary alternative to the IMF. But Sri Lanka’s current situation is more than a subject matter for research. It would be odd if looking to Beijing as an alternative to the IMF has not crossed the mind in the Rajapaksa government. The government speaks its mind on economic matters through half a dozen people. Everyone of them is dead set against the IMF. Six months ago, they were conventional IMF followers. But no one is mentioning Beijing as an alternative.

There are many factors at play. Until 20 years ago, there was no China and developing countries had only one place to go to, namely, the West and institutions dominated by the West. The entry of China has provided an alternative source and somewhat levelled the playing field. But only ‘somewhat.’ A part of that ‘levelling’ also includes the potential for ‘democratizing’ the operations of the World Bank and the IMF which are dominated by the US and its European allies. But China may not be all too keen about ‘democratizing’ anything anywhere. China’s development assistance and lending patterns are also totally driven by domestic reasons and for domestic purposes.

China’s external financial relations and operations are always “rooted in central government decisions” and are implemented only by “state-affiliated institutions.” China is not an incubator of private investors or a source of foreign direct investments. At the same time, China is not the inventor of financial diplomacy. The US and France, for example, have provided direct emergency financial assistance, bypassing the IMF, to countries in the Middle East and Africa, respectively.

Sundquist lists three key decisions taken at different times by the Chinese government, that apparently have influenced the ebb and flow of Chinese financial activities overseas. First, in 2006, came the decision to extend externally the hitherto domestic operations of the China Development Bank as a parallel to the World Bank. This decision was made “at a time of fractured political power in China,” according to Sundquist. The second was the Belt and Road Initiative (BRI) launched by President Xi Jinping even as he concentrated the powers of the state in the office of the President. The third key decision so far has been the roll back of the BRI initiative in 2018 to concentrate on the domestic economic situation in China.

Put another way, the rest of the world, especially countries that may want to look to China to avoid the west or the IMF, have no certainty whether or when China is going to keep its lending window open, and to what levels. There is also the concern over the lack transparency involving China’s assistance, that it ignores issues of domestic corruption and money laundering, and that it is more short-term oriented without long term sustainability.

Among Sundquist’s assertions based on his research are that “Chinese loans have indeed enabled some countries to avoid turning to the IMF and enabled others to negotiate deals with fewer attached conditions.” As his Zimbabwe case study has shown, “China has typically denied bailouts to countries without reliable sources of foreign exchange,” and has paid “attention to debt sustainability rather than trying to ensnare them in debt traps.” Overall, says Sundquist, “Borrowing governments will have to weigh the respective benefits of IMF and Chinese loans diligently. They will, however, be happy to have the choice.”

He further notes that “Since 2017, the pace of new loans has slowed, and China has begun to confront the problem of borrowers unable to meet their debt service obligations. It is entirely possible that as China’s position begins to resemble that of traditional Western creditors, it will begin to behave in a more similar manner to them and work more closely with the IMF.” Where does all this leave Sri Lanka? Is there a third way, that avoids both the IMF and China, to overcome the current balance of payment crisis? It is up to the government to clarify.