CHINA’S FOREIGN Minister Wang Yi will visit Sri Lanka next week in the midst of a crippling economic crisis that has seen Colombo turn to Delhi for help and fast pedal the long-delayed India-Sri Lanka plan for joint development of the Trincomalee oil tank farm.
Wang Yi’s two-day visit, expected between January 7 and 9, will take place against the backdrop of a spat between the two countries over a contaminated consignment of organic fertiliser that has resulted in unexpected tensions between both countries.
After Colombo cancelled an order for the import of 99,000 tons of the fertiliser, Beijing blacklisted the Sri Lankan state-run People’s Bank and accused it of a “vicious” default on the letter of credit payment.
India angle: 1987 Accord
INDIA’S INTEREST in the oil tank farm dates back to the signing of the 1987 India-Sri Lanka Accord, which stated in the annexure that the work of refurbishing the tank farm located in the north-eastern province of Trincomalee would be undertaken jointly by the two countries. The agreement lay dormant as first India and then Sri Lanka fought the Tamil Tigers. An attempted revival in 2003 went nowhere. In 2017, the two sides agreed to operationalise the long-standing agreement, but opposition from trade unions of the Ceylon Petroleum Corporation held up any progress in the matter.
Earlier this month, with the Chinese company launching arbitration proceedings for a compensation of $8 milion, Sri Lanka drew a line under the controversy by agreeing to make a payment of $6.4 million.
Wang Yi’s visit will be significant for the sweeteners he may offer the Rajapaksa government to retrieve lost goodwill.
Meanwhile, Colombo is moving ahead on finalising plans for jointly developing with India a massive oil tank farm at Trincomalee. Although neither country is saying it in so many words, Delhi may offer in return financial assistance to help Sri Lanka tide over its present crisis.
“We have said that both matters should progress in parallel, and progress in one should reinforce the progress in the other towards strengthening economic ties,” said an official source, adding that the coming month may see important developments on the Trincomalee oil tank farm deal.
Sri Lanka’s foreign exchange reserves sank to $1.6 billion at the end of November. The shortage has led to a drop in food imports, pushing up prices of essentials in the country. An IMF bailout is the last option that Sri Lanka does not wish to take.
Earlier this month, international ratings agency Fitch downgraded Sri Lanka from CC to CCC, warning that the country was likely to default on two international sovereign bonds, one coming up in January 2022 for $500 million, and another due in July for $1 billion.
The Central Bank of Sri Lanka termed Fitch’s action “hasty” and said it had not taken into account Colombo’s diplomatic outreach to friendly countries for help with financial assistance. A statement from the bank said cash flows were expected by the end of December 2021 and March 2022.
“The government and the Central Bank remain confident that these inflows will materialise and the end-2021 level of Gross Official Reserves will remain above USD 3 billion. Fitch appears to have ignored the standby SWAP facility with the People’s Bank of China of around USD 1.5 billion,” the media release said.
Apart from loans and Foreign Currency Term Financing agreements with China during the year, Sri Lanka signed the three-year “standby” swap agreement with Beijing in March 2021. The Central Bank Governor said earlier this month that the government may draw on this to pay for imports from China.
But Colombo has also appealed to India for help. Sri Lankan Finance Minister Basil Rajapaksa, who visited Delhi in November, was offered a “four-pronged package” – a line of credit for fuel impoorts only from India; early finalisation of the joint India-Sri Lank development plan for the Trincomalee oil tank farm; an offer of a currency swap to help Lanka pay its foreign debt and facilitation of Indian investments in different sectors.
Earlier this week, the Sri Lankan weekly Sunday Times reported that Energy Minister Udaya Gammanpila had instructed the Ceylon Petroleum Corporation (CPC) chairman to form a subsidiary company, Trinco Petroleum Terminal Ltd, which will be the special purpose vehicle for the India-Sri Lanka joint development of the Trincomalee oil tank farm.
The decision is expected to be approved at a Cabinet meeting next week. The newspaper reported that President Gotabya Rajapaksa had given approval for the formation of the subsidiary.