President Ranil Wickremesinghe is expected to leave for Japan next month as Japan tightens the noose around Sri Lanka after being sidelined and taking U-turns on infrastructure projects offered to them. At the same time, going for the International Monetary Fund (IMF) bailout package at the outset of the severe financial crisis and defaulting debt repayment was of concern to Japan. Japan is Sri Lanka’s oldest development partner and the debt amounts to around 10% of Sri Lanka’s total budget. Japan however, is unwilling to lend money to Sri Lanka and the President’s planned visit to Japan is key and  would be to convince the Japanese about the credibility of his Government.

President Wickremesinghe following former President Gotabaya Rajapaksa’s exit, stated that relations with Japan had broken down and that it would take time to repair them and regain their confidence.

The let down

It was because the Rajapaksa regime chose China over Japan and cancelled the East Container Terminal (ECT)Development Project at the Port of Colombo, which had been offered to Japan and India to develop jointly with the Sri Lanka Ports Authority. During former President Gotabaya’s presidency, he also cancelled the Light Rail Transport (LRT) project that had been assigned to Japan. His advisers had said that Japan’s LRT was costly and cited several setbacks in going for it. There were also talks that China was also one of the competing bidders and the project might shift hands. For Japan, it was not only a major setback on their bilateral relations with Sri Lanka, but also a source of national shame for Japan. The Japanese are not known to break promises and expect other countries to do the same.

Even former Foreign Minister, G. L Peiris at the beginning of this year said, “There is no harm in admitting that certain situations could have been handled better”, referring to the termination of the Japan-funded Light Rail project in Colombo. According to media reports, The LRT was designed with 16 stations over 15.7 kilometres of track in and around Colombo. Completion of this project was April 2026 and the loan had a 12-year grace period, with an interest rate of 0.1 per cent. The consultancy contract was awarded in March 2019 and detailed design was at a final stage.

Japan International Cooperation Agency (JICA), Overseas Coastal Area Development Institute of Japan, Japan Port Consultants Ltd and the Oriental Consultants Global Co., Ltd jointly submitted its final report on the Preparatory Survey for the Project of Development of the East Container Terminal in the Colombo South Port in Sri Lanka. The report said Under, the National Development Policy ‘Vision 2025’, the Government has aimed to make Sri Lanka one of the world’s leading logistics bases by 2025 and has focused on improving infrastructure and service quality of the East Container Terminal (ECT) of the Colombo South Port. In addition, SLPA has formulated the ‘Port Development Master Plan’ in 2016, giving high priority to the development of the ECT.

Based on the policy and plan, GOSL, the Government of India and the Government of Japan signed a Memorandum of Cooperation (referred to as ‘MoC’ )on 28 May 2019, confirming that the three countries shall cooperate in the development, operation and maintenance of the ECT in the Colombo South Port.

Given the above situation, JICA decided to conduct the Preparatory Survey (referred to as ‘The Survey’) to collect information and data necessary for appraising the viability of applying the investment and financing by Japan for the Development of the ECT in the Colombo South Port and for a desirable two-tiered system, the draft framework of the concession agreement between SLPA and TOC and the business plan and financial model of TOC.

In the later phase, however, changes in the situation surrounding the ECT resulted in a reduced possibility of utilising a Japanese ODA loan or JICA’s Private-Sector Investment Finance Scheme for the project. For this reason, JICA decided to cut down the scope of the survey and to terminate The Survey.

The massive protests by Port Trade Unions led to the project being scrapped, said former Prime Minister Mahinda Rajapaksa and donor countries such as Japan and India rejected the views of the Rajapaksas. 

The recent development is that Sri Lanka will request Japan to invite the major creditor nations, including China and India, for bilateral debt restructuring talks with President Ranil Wickremesinghe scheduled to visit Tokyo next month. He is expected to meet Japanese Prime Minister, Fumio Kishida as well. “Someone needs to call in and invite the major creditor countries. We will request that Japan do so”, President Ranil Wickremesinghe told Reuters in a recent interview.

Also recently, Secretary, Foreign Affairs, Aruni Wijewardane led bilateral consultations with a senior delegation from the Ministry of Foreign Affairs of Japan led by the Assistant Minister of the Southwest and Southeast Asia Affairs Kano Takehiro in July, 2022. The Sri Lanka delegation included the Governor of the Central Bank, Dr. P. Nandalal Weerasinghe, Secretary to the Treasury, Mahinda Siriwardana and senior officials of the Ministry of Foreign Affairs, Defence and Sri Lanka Navy.

OAP in Japan

The Regional Office for Asia and the Pacific (OAP) is one of the IMF’s major regional offices around the world. It was established in 1997 in Tokyo with the help of Japan, and now serves as a critical outpost in the Asia-Pacific region of 37 member countries including a few emerging economies. Its presence offers testimony to the substantial and growing importance of the region in the global economy. OAP facilitates coordination between IMF headquarters and those member countries and promotes IMF’s various initiatives in the region through key activities. The discussions focused on enhancing bilateral political, economic and defence cooperation as well as strengthening people-to-people ties.

Japanese Embassy responds on suspending 12 JICA funded projects

As Japan remains a major contributor to the IMF, Japan too has taken Sri Lanka’s IMF bailout seriously. Recently, Ports, Shipping and Aviation Minister, Nimal Siripala de Silva said, 12 Japanese projects funded by JICA   had been temporarily suspended.

He revealed this in Parliament citing that Japan’s JICA organisation in particular came and met him and submitted a letter. He further added “Now that our country is in an economic crisis, we cannot repay the debt, so until the IMF prepares a plan for this, they announced the temporary suspension of not only the Taisei project, but also 12 projects supported by Japan and JICA”. However, the Minister said, ”After  the IMF takes steps to restructure the loan with us, they will give us the money again”.

Ceylon Today wrote to the Japanese Embassy last week to inquire about suspending of the 12 projects by JICA to which they officially responded:  “The Embassy is aware of the news article to which you referred adding that the Embassy understands that in general terms, when a borrowing country defers its repayment, JICA is able to take measures to preserve its accounts receivables including the suspension of disbursement in accordance with the procedures agreed between a borrowing country and JICA. However, we would like to refrain from commenting further on this matter.”

Earlier, Japanese Prime Minister Fumio Kishida in his congratulatory message to President Ranil Wickremesinghe said, he expects political stability in Sri Lanka and indicated that he also expected rapid progress in the development of Sri Lanka through the discussions with the IMF.

The China factor

The US, India, Japan, and Australia have all pushed hard for an IMF bailout for Sri Lanka in the amount of USD 3 billion (estimated). In addition, the IMF has urged all creditors to restructure their debt repayments to Sri Lanka. The most important aspect of this move is that, as the IMF has stated, China, one of Sri Lanka’s creditors, must also restructure its debt to Sri Lanka, but China is hesitant.   Already, US Ambassador to Sri Lanka Julie Chung stated that all creditors of Sri Lanka must restructure their debts to the country on an equal playing field.

China’s hesitation has been based on an IMF bailout that came from the Quadrilateral Security Dialogue (Quad countries), which is pushing Sri Lanka strategically. China’s geopolitical rivalry with the Quad has undermined China’s investment projects under the Belt and Road Initiative. The Quad members have come under fire from China for “ganging up in the Asia-Pacific region.”

 In April 2022, Chinese Ambassador to Sri Lanka, Qi Zhenhong, who met senior journalists in Colombo   expressed China’s concerns about the Sri Lankan Government’s approach to the International Monetary Fund (IMF). He said, “We know that Sri Lanka’s Finance Minister, Ali Sabry (now Foreign Minister) and his delegation are having negotiations with IMF officials at this moment.  The bailout will always be based on terms and conditions and we have no idea what they would be.  We will be closely watching but according to past experiences, all countries that decide to receive an IMF bailout have to follow very strict restrictions on financial structures.  It’s too early now. I cannot give what impact it would have on China-Sri Lanka ties.  But we are sure that under the current difficulties Sri Lanka has the urgent need for assistance and China will continue its support including investments and get Sri Lanka out of the crisis and Sri Lanka at the same time should be self-sustainable”. He further said that foreign debt, including domestic debt, must be sustainable. “Your country will be unable to achieve long-term development goals. I read in the newspaper where the Finance Minister stated that the country has been relying on credit since Independence. I share a similar opinion. The current situation did not occur overnight. It has a long history. China’s financing and financial assistance to Sri Lanka have nearly been used up in infrastructure development. According to China’s experience over the previous 40 years, in order to attract foreign investment and fulfil development goals, infrastructure projects must be extensively funded. China would do everything possible to help Sri Lanka not only overcome the current crisis but also accomplish future development goals,” he added.

Japan – highest lenders to SL

Japan’s push for the IMF has another face too. They are the highest lenders to Sri Lanka and it stands at USD 621, 587mn as of 2021  but the interest rates are much lower compared to other creditors. Also, their projects have generated revenue and are not subject to controversy or corruption, despite the recent controversy where Minister Nimal Siripala de Silva had allegedly demanded a bribe from Japan’s Taisei Company.  The Japanese Embassy in Colombo reportedly informed former President Gotabaya Rajapaksa that the office had disclosed information based on evidence, adding that the Ambassador did not want to embarrass the Government by going public, so the Embassy had taken steps to correct the situation. The Minister was reinstated after he was cleared.  

Based on the External Debt Stock and External Debt Service Payments of the Ministry of Finance: By end August 2021, the total outstanding external debt of the Central Government stood at USD 33.9 billion total debt service payments from 1st January to 31st August 2021 amounted to USD 2,767 million, of which, USD 1,978 million was in lieu of principal repayments and the balance USD 789 million for the payment of interest. This also includes the settlement of the international Sovereign Bond (ISB) amounting to USD 1,000 million in July 2021. 

The Government is stuck amidst the IMF bailout after the last discussions held in June 2022. The IMF said they had constructive and productive discussions with the authorities on economic policies and reform to be supported by an IMF Extended Fund Facility (EFF) arrangement and also, significant progress was made, and discussions will continue virtually to reach a staff-level agreement on the EFF arrangement in the near term.

The objectives of the new IMF-supported programme would be to restore macroeconomic stability and debt sustainability, while protecting the poor and vulnerable, safeguarding financial stability, and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.

Final phase of IMF agreement

The final phase of the IMF agreement requires constructive discussions and creditors must comply with IMF demands. President Wickremesinghe’s visit to Japan must first win the Japanese people’s hearts before attracting an IMF bailout. The geopolitical concerns of creditors have waned with the IMF, which is critical for the President. The recent geopolitical upheaval was the invitation of a Chinese surveillance ship, which is now docked at the Hambantota Port. The Government is attempting to ‘have the cake and eat it,’ and making it difficult for Sri Lanka to establish credibility in the first place. President Wickremesinghe is also hoping to visit China during the same tour (It is still not known whether he would visit Japan and then China or vice versa), and would be a tour of duty but interesting altogether.