Sri Lanka President Anura Kumara Dissanayake has received cabinet approval to borrow the equivalent of $500 million in renminbi (RMB) from Exim Bank of China for an infrastructure project.
The first-of-its-kind move necessitates Sri Lanka to convert its US dollar reserves to repay the loan, which could push Colombo towards a debt trap.
The decision to take the new loan from China and an additional $438 million from Sri Lankan state coffers is meant to complete the first section of the Central Expressway (CEP 1), ET has learnt. The project has been delayed since construction began in September 2020.
The change in currency from USD to RMB is at the request of China Exim Bank. It additionally necessitates an amendment to the original commercial contract, for which cabinet approval has also been sought. This will place further strain on the country’s fragile foreign reserves, said experts.
The Central Expressway project was first agreed in 2019 under a preferential buyer’s credit arrangement between Sri Lanka and China’s Exim Bank, valued at nearly $1 billion. But of the original amount, only $51.5 million was disbursed before the loan was suspended amid Sri Lanka’s deepening economic crisis.
After last year’s external debt restructuring, China’s Exim Bank reduced its commitment, agreeing to provide just $500 million in yuan. The Sri Lankan government has now pledged to cover the shortfall with public funds, while also settling $200 million in outstanding claims and interest to Metallurgical Corporation of China Ltd (MCC), the state-owned contractor from China.
Five of Sri Lanka’s largest domestic construction companies urged the government to cancel the direct award to MCC and instead hold competitive tenders. Local firms argued such a move would reduce costs and ensure swifter completion. Instead, Colombo has chosen to persist with the Chinese contractor, claimed a Colombo-based source speaking on the condition of anonymity.
China is Sri Lanka's largest bilateral creditor, providing loans for infrastructure projects including the Hambantota Port, which Sri Lanka leased to China in 2017 for 99 years. Chinese loans to Colombo are around $7 billion and significantly contribute to Sri Lanka's debt crisis, especially through investments in projects under the Belt and Road Initiative.
The first-of-its-kind move necessitates Sri Lanka to convert its US dollar reserves to repay the loan, which could push Colombo towards a debt trap.
The decision to take the new loan from China and an additional $438 million from Sri Lankan state coffers is meant to complete the first section of the Central Expressway (CEP 1), ET has learnt. The project has been delayed since construction began in September 2020.
The change in currency from USD to RMB is at the request of China Exim Bank. It additionally necessitates an amendment to the original commercial contract, for which cabinet approval has also been sought. This will place further strain on the country’s fragile foreign reserves, said experts.
The Central Expressway project was first agreed in 2019 under a preferential buyer’s credit arrangement between Sri Lanka and China’s Exim Bank, valued at nearly $1 billion. But of the original amount, only $51.5 million was disbursed before the loan was suspended amid Sri Lanka’s deepening economic crisis.
After last year’s external debt restructuring, China’s Exim Bank reduced its commitment, agreeing to provide just $500 million in yuan. The Sri Lankan government has now pledged to cover the shortfall with public funds, while also settling $200 million in outstanding claims and interest to Metallurgical Corporation of China Ltd (MCC), the state-owned contractor from China.
Five of Sri Lanka’s largest domestic construction companies urged the government to cancel the direct award to MCC and instead hold competitive tenders. Local firms argued such a move would reduce costs and ensure swifter completion. Instead, Colombo has chosen to persist with the Chinese contractor, claimed a Colombo-based source speaking on the condition of anonymity.
China is Sri Lanka's largest bilateral creditor, providing loans for infrastructure projects including the Hambantota Port, which Sri Lanka leased to China in 2017 for 99 years. Chinese loans to Colombo are around $7 billion and significantly contribute to Sri Lanka's debt crisis, especially through investments in projects under the Belt and Road Initiative.
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