Yuan Wang 5 standoff: Sri Lanka’s IMF process may be under threat

This stand-off is building up in the backdrop of the US-China stand-off over Nancy Pelosi’s visit to Taiwan.

Can Sri Lanka’s resistance against letting China dock the Yuan Wang 5 at Hambantota stall its efforts for a bailout package at the International Monetary Fund? Yes, if China decides so. And by accounts reaching Delhi, it appears Beijing has sought to play this card in their hectic conversations with Colombo to go back on its advice to defer the ship’s visit.

So, just how can China play spoiler? For Sri Lanka’s bailout package to go through, it requires first an approval of principal creditors on IMF’s Sri Lanka Debt Sustainability Assessment (DSA) report. Needless to say, this report is quite negative on Sri Lanka given its current financial situation. Therefore, a lenient view will have to be taken by creditor countries , many of whom are on the IMF Board.

Now, that’s where the catch lies. IMF would not want that any package, if and when it materialises, goes into just servicing Sri Lanka’s debts. As of now, Sri Lanka’s public debt is 115% of its GDP. Usually, according to World Bank and IMF, this should not cross to 60-65% even for poorer countries. Over 40% of the debt composition is external and there, four categories emerge – multilateral aid, private commercial credit, China and credit by Paris Club countries.

Any package requires these creditors agree to terms which allow IMF package to be used for larger public benefit and economic revival than service debts. In other words, many of these countries will have to either write off some of their loans or delay, possibly restructure their payment schedules. It’s important to note that while China is among the principal creditors to Sri Lanka, India is also a major creditor in the non-Paris club category.

China, however, being among the largest creditors needs to grant its consent to the IMF. The flip side is Beijing can both hold and drag the process longer, thus extending Sri Lanka’s deteriorating economic plight. Yes, technically India too is among the creditors who can hold off consent but given that New Delhi was proactive in reaching assistance, Colombo would hope it would not go in the opposite direction.

The worrying part is that China may link Sri Lanka’s message to defer the Yuan Wang 5’s ‘refueling stop’ at Hambantota with the IMF approval process. According to Beijing, this is a research vessel, making a routine halt with no negative intent.

However, India has raised a security red flag because the Yuan Wang 5 is a designated Strategic Support Vessel that tracks Chinese Inter Continental Ballistic Missiles and rockets once they lift off beyond their base station controls. More importantly, as Indian intelligence has alerted, the vessel has capabilities to intercept signal intelligence in frequency bands used by Indian armed forces. The Indian assessment is confirmed by US inputs too.

In this context, the presence of the vessel in Hambantota is being seen as more than just an immediate threat but a start of a practice that could eventually turn the port into an active Chinese military asset – a long-held fear in Indian military circles.

This stand-off is building up in the backdrop of the US-China stand-off over Nancy Pelosi’s visit to Taiwan. In earlier days, it would be assessed that China does not usually open multiple fronts. But events, as they have unfolded thus far, show that China has developed the confidence and capability to simultaneously handle multiple conflict points. It’s precisely for this reason, India will want to sustain the pressure on Lanka and let China make a hard call on its IMF approach.

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