Smaller Emerging Countries May Play China, EU, U.S. Off Against Each Other for Finance: the Sri Lanka Example? (2)

–These three regions — China, EU, US — have “belt and road” initiatives; desperate, yet strategic, Sri Lanka has apparently won China’s ear
–Nations stuggle to build back better after pandemic
–Climate transition forcing better collaboration
–Sri Lanka flirts with default: Economist
–New Development Bank sets up project fund

Jan. 13-14, 2022 — LONDON: CarrZee: Finance may be available from multilateral organizations or these three big countries / groups as they seek to boost their respective global influence, if Sri Lanka’s plans offer hope, that is.

Sri Lanka ruled out an IMF bailout on Wednesday and said it plans to seek another loan from China to address an economic crisis that has led to food and fuel shortages, AP reported in The Hindu.

Talks with China over a new loan were at an “advanced stage”, and a fresh agreement would service existing debt to Beijing, according to the report.

The possibility of a new loan comes after President Gotabaya Rajapaksa asked Chinese Foreign Minister Wang Yi last weekend for Beijing to consider restructuring debt repayments. Delays in securing fresh funds — key to meeting loan obligations — have been cited by Fitch Ratings and Moody’s Investors Service as reasons for cutting Sri Lanka’s credit score deeper into junk and raising the specter of default, Bloomberg reported.

See this Economist chart from Jan 10:

Economist Link: Almost three years since terrorists blew up hotels along Colombo’s lovely beaches and two years since covid-19 shut down international travel, tourists have begun returning to Sri Lanka, providing sorely needed foreign exchange. The country’s stockmarket has been bounding along, up by more than 80% in 2021, trailing only commodity-rich Mongolia among global bourses. Corporate profits have been strong, too. gdp growth last year was somewhere between 3.5% (by private estimates) and 5% (by the government’s). This suggests a thriving economy. Yet alarm bells are clanging.

Encouraging though the renewed tourist arrivals may be, they are still barely a fifth of the pre-pandemic peak. Exports grew strongly in the fourth quarter of 2021 but are still too meagre to prevent a looming financial crisis. Years of heavy foreign debt and current-account deficits have taken a toll. Foreign reserves have collapsed (see chart). Supplies of oil, cooking gas, milk, wheat and medicine are running short. A rapidly depreciating currency has helped the country’s exporters, including clothing manufacturers and tea growers. But it has made servicing foreign-denominated debt more costly and has stoked inflation, which jumped during 2021 to 12% and appears to be accelerating….

Asia’s climate-finance needs are great: see this CarrZee.org link.

IMF report: Over the past couple of decades, central banks in emerging markets have made substantial progress in developing the credibility to conduct countercyclical monetary policy. During the COVID crisis, many of these central banks not only cut interest rates sharply, but also deployed a range of tools to help restore market functioning, including asset purchases. And, while some of these central banks now consider moves to tighter monetary policy stances, the likely use of these policy tools again in the future merits a closer look.

BRIC countries have also set up their own New Development Bank, which is establishing a “Project Preparation Fund”

That only has $7 million in it so far, with contributions from China, Russia and India, according to the most recent accounts here:

(More to come)

Photo by Alex Azabache on Pexels.com

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