The Chinese debt trap is strangling the economy of India’s neighbours, particularly Pakistan and Sri Lanka. After incurring massive debt from China, paying it has become an issue for these countries, raising worries of a sovereign default. To forestall a Balance of Payments (BoP) crisis, Pakistan has devised alternative measures for filling the growing dollar finance deficit in order to avoid a full-fledged catastrophe until the delayed IMF programme is reinstated, according to The News.
Pakistan urgently needs dollar inflows to restore trust, since the current account deficit has widened and foreign currency reserves are dwindling at an alarming rate. Pakistan and the International Monetary Fund (IMF) have been unable to reach an agreement on concluding the 7th Review and releasing the $960 million tranches under the $6 billion Extended Fund Facility. The IMF has stated that it will have negotiations with the ‘new’ administration, and given the volatile political climate, the resumption of the IMF programme appears to be in jeopardy.
According to top official sources, ‘China agreed in principle to allow a rollover of a $2.5 billion commercial loan last week, but Beijing officials are still processing it’. However, there is another possibility: the Chinese may have first refused to roll over debts, but following involvement at the highest level when Pakistan Prime Minister Imran Khan visited China, Beijing officials may have shown readiness to move forward, according to the article.
Sri Lanka has suffered the greatest economic crisis since its independence in 1948, according to Global Times, when President Gotapaya Rajapaksa declared an economic emergency in September 2021. According to the central bank, the government has a $2 billion foreign exchange reserve and $1 billion in notes expiring in July 2022. The country’s debt-to-GDP ratio has risen from 85% in 2019 to 104% in 2021. The present foreign exchange scarcity has made it impossible to buy everyday basics such as petrol, electricity, paper, milk powder, and so on.
The country is experiencing hours of power outages every day, and newspaper production has been suspended due to a lack of printing paper. According to the data, the country’s overall inflation rate is more than 17%, while food inflation reached 30.2 per cent in March. Colombo borrowed the most from the global capital market, accounting for 47% of its total debt, followed by the Asian Development Bank (ADB) at 13%, Japan at 10%, China at 10%, and the World Bank at 9%, and India at 2%.