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India and China compete over Indian Ocean debt-relief diplomacy



Sri Lanka’s navy scours the island nation’s northern waters in search of Indian smugglers hauling boatloads of turmeric, a staple spice used widely in South Asian cooking. The ultranationalist government of President Gotabaya Rajapaksa this year added the yellow seasoning to a list of banned imports in a desperate effort to prevent an outflow of precious US dollars.

Meanwhile, the Maldives, to the south-west of Sri Lanka, has imposed limits on the use of dollars by locals to settle their monthly debit and credit card bills. The Bank of Maldives, the largest commercial bank in the region’s smallest country, in September set a monthly limit of $250 for each card, widely used by small businesses in the archipelago to pay for imports.

The commodity and currency crackdowns by the two Indian Ocean countries have a common thread spotlighting their shared need to shore up fast-depleting foreign — overwhelmingly dollar — reserves. The cash crunch is forcing both governments to seek financial lifelines to settle mounting international debts.

That vulnerability is providing a fresh opportunity for China and India to deepen their influence in the nations as they engage in a growing contest to gain the upper hand in the strategic Indian Ocean. Though part of ongoing broader economic, financial and geopolitical ambitions on display by the world’s two most populous countries, it marks a new stage of engagement in a region where they have already been competing in infrastructure financing for years.

Officials in Sri Lanka and the Maldives are quick to acknowledge how beholden they are to the Asian giants as they struggle to stay solvent in a growing sea of red ink, problems plaguing other indebted countries in the region from Pakistan to Cambodia.

Sri Lanka and Maldives debt

“India has offered a swap arrangement,” Nivard Cabraal, Sri Lanka’s minister overseeing money, capital markets and state enterprise, told Nikkei Asia. “We have been in touch with the Chinese Development Bank as part of the options available to Sri Lanka to have inflows coming on a bilateral basis.” The country’s dependency on New Delhi and Beijing has increased after the one-year-old Rajapaksa government eschewed seeking a bailout from the IMF.

According to Mohamed Nasheed, the former president of the Maldives, the government of President Ibrahim Solih is in talks with China for a reprieve from the multimillion-dollar debt owed to Beijing. “It is still being negotiated, but not yet settled,” Mr Nasheed, currently the Speaker of parliament, told Nikkei. The government hopes “the Chinese will delay the repayments by a few years at least”, he said.

India’s debt-relief offer differs from China’s approach. In Sri Lanka, New Delhi provided a $400m currency swap facility this year through the Reserve Bank of India, its central bank, helping to boost the island’s reserves.

It has kept the Rajapaksa government guessing, however, on its other requests — a further $1bn currency swap and a $1bn debt moratorium on loans Sri Lanka owes India. Diplomatic sources in the Sri Lankan capital say that India has an opportunity to leverage the current moment as Sri Lanka’s economy nears default.

A construction worker is seen at a construction site near a China-funded bridge in Male, the capital of the Maldives, in September 2018 © Reuters

China, which styles itself as an “all-weather friend” to Sri Lanka, has pumped in $500m this year out of a $1.2bn syndicated loan it has pledged through the China Development Bank. Sri Lankan authorities have reportedly approached Beijing for a further $1.5bn currency swap. Not surprisingly, Chinese diplomats in Colombo welcome being the lender of last resort.

“The $700m facility agreement is to be finalised between China Development Bank and the finance ministry of Sri Lanka,” Luo Chong, the Chinese embassy’s spokesperson, told Nikkei, referring to the remainder of the $1.2bn loan. “So, we are positive about the process.”

In the Maldives, conversely, it is India that has been more generous after Mr Solih’s pro-Indian Maldivian Democratic Party defeated former President Abdullah Yameen, who was openly pro-China and anti-India, in a shock election outcome in 2018. New Delhi has steadily injected an estimated more than $2bn through loans, grants, credit lines and currency swaps.

“India has adopted a package approach in which it works on the demand basis of South Asian countries while assisting them in short projects,” said Pankaj Kumar Jha, professor of defence and strategic studies at New Delhi-based Jindal Global University. “At the same time, [it is] providing grants and aid which can be restructured through deferred payments and the repayment terms have built confidence.”

Maldivian President Ibrahim Mohamed Solih, left, and Modi smile after delivering a joint press statement in New Delhi in December 2018 © Getty

Despite India’s munificence, China still holds the influential hand. The Maldives had to swallow a bitter pill served up by a World Bank report in mid-2020 that ranked it among nine countries facing “debt distress” because of Chinese loans that exceed 30 per cent of its national obligation — in the Maldives, it is 45 per cent. Consequently, China agreed to slash $25m from the $100m in official debt the Maldives had to settle with it this year. It was a special arrangement under the Group of 20 Debt Service Suspension Initiative, or DSSI, to postpone debt servicing on bilateral loans.

The groundbreaking offer was greeted with relief in the capital, Male. “We have received the DSSI for our direct debt obligations from the official bilateral creditors,” a senior official from the president’s office told Nikkei. “The government of the Maldives has strongly advocated for this to be extended until the end of 2021.”

China's share of external debt stocks in seven Asia countries in 2019

Recent downgrades by global rating agencies have compounded the debt crisis for the Maldives and Sri Lanka, leaving little room for them to seek alternative financing in international markets.

In November, Fitch Ratings downgraded the Maldives to a “CCC” rating from the previous “B” rating due to the coronavirus pandemic. It forecast the tourism-dependent economy to contract by 30 per cent and government debt to jump to 110.7 per cent of gross domestic product in 2020.

Two months earlier, Moody’s Investors Service downgraded its rating on Sri Lanka two notches from “B2” to “Caa1” — junk status — saying the pandemic’s economic shock exposed the country to financial risks. “We expect Sri Lanka’s debt burden to increase to 100 per cent of GDP over 2020-21, above the Caa-rated median of 88 per cent,” Moody’s said last month.

Fitch immediately followed Moody’s with further bad news, downgrading Sri Lanka’s rating to “CCC” from “B-” after the government presented its 2021 budget to the parliament in November. The “risks to the sovereign’s ability to meet its external-debt servicing obligations have increased”, Fitch said.

Xi, left, waves while standing next to Sri Lanka’s then President Mahinda Rajapaksa during an official welcoming ceremony at Bandaranaike International Airport in Katunayake, Sri Lanka in September 2014 © AFP via Getty Images

Seasoned analysts are not surprised by the severe measures — such as the imported turmeric ban — that Sri Lanka has imposed to preserve its dwindling dollars. This policy shift is “to tackle a macroeconomic issue of a worsening balance of payments deficit due to [a] fall in foreign receipts from exports, foreign direct investment and tourism”, said Ganeshan Wignaraja, senior research associate at the London-based Overseas Development Institute. It was also to deal with a “longer-term structural issue of inadequate domestic production in agriculture and manufacturing which has led to high import dependence,” he added.

The debt picture for Sri Lanka’s $88bn economy confirms an appetite for living on borrowed money. It had $50.8bn in loans by the end of June, the largest slice from international markets that cannot be renegotiated. Bilateral lenders such as China account for 10 per cent of the debt, mostly for large infrastructure projects, followed by Japan, previously Sri Lanka’s largest lender.

This year, Sri Lanka had to settle $4.2bn in foreign debt, which included paying off a $1bn sovereign bond in October. Interest payments to service loans were $1.4bn and a further $1.8bn in loans to multilateral and bilateral lenders were settled, according to the finance ministry. From 2021 until 2024, Sri Lanka faces annual foreign debt payments averaging $4bn, with next year’s principal at $2.6bn and estimated interest at $1.4bn.

Port City Colombo is seen under construction in Colombo, © Getty

The turn to India and China coincided with Sri Lanka’s diminishing foreign reserves, which have slumped to a three-year low of $5.8bn after the October’s sovereign bond was settled.

“We have a situation where we have high annual foreign debt repayments over the next several years,” said Trisha Peries, head of economic research at Frontier Research, a Colombo-based think-tank. “If the government doesn’t approach the IMF for funding, Sri Lanka would have to rely more on bilateral lenders who would be able and willing to provide continuous support over the next few years and not just in the short term.”

The foreign debt picture in the $5bn economy of the Maldives is more opaque and characterised by public spats over how much the country owes China. The outspoken Mr Nasheed told Nikkei that the amount was more than $3bn. “My figure is from the parliament finance committee; we work from first principals as well,” he said. The Chinese government disagrees, saying it is closer to $1.45bn.

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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Experts in the Maldives say the country should consider the financial lifelines to stave off default as a measure of political benevolence. At a time of great difficulty in the Maldives, a willingness on the part of the Chinese government to intervene was “a big help not to the government of the Maldives, but to the people”, said Fazeel Najeeb, former governor of the Maldives Monetary Authority, the central bank. “An agreement to negotiate [outstanding loans] is always a matter of goodwill.”

The Maldives’ depleted international reserves of $649m are due to be tapped to meet multiple foreign debt servicing commitments from the fourth quarter of this year through 2022. One loan of $142m has to be settled next year, and a foreign bond of $250m matures in June 2022.

But for both the Maldives and Sri Lanka, there are warning signs over just how far China, with much deeper pockets than India, is willing to go to prevent defaults.

“China has offered debt relief [to cash-strapped countries like Pakistan, Angola and Zambia] that is short-term relief and meant to complement the IMF, not replace it,” said Akhil Bery, South Asia analyst at Eurasia Group. “It was clear that China was not willing to bail out Pakistan, despite their all-weather friendship.”

A version of this article was first published by Nikkei Asia on December 1 2020. ©2020 Nikkei Inc. All rights reserved

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Emerging Markets

Polish women count cost of tough abortion curbs




Even before Poland all but outlawed abortion, Zofia has been thinking about moving abroad. But the near-ban that took effect earlier this year helped her make up her mind: this autumn she plans to move to Prague in the Czech Republic.

“I feel better there, freer, and being a woman there doesn’t make me feel weaker or worse,” she said. “I love my life in Warsaw. But when the [abortion ban was mooted], I thought, I don’t want to live here any more . . . And I don’t want my kids to live here.”

The 31-year-old artist is one of thousands of Polish women outraged by the tightening of the country’s abortion laws which, even before the overhaul, were among the strictest in the EU. Their anger centres on a ruling by the Constitutional Tribunal in October last year, which declared that a 1993 law allowing abortions in the case of severe foetal abnormalities was unconstitutional.

The ruling came into force in January, leaving only two grounds for an abortion in Poland: a threat to the mother’s health or if the pregnancy is a result of rape or incest. Such cases made up just 2.4 per cent of the 1,100 legal abortions in Poland in 2019.

Hundreds of thousands of Poles took to the streets when the ruling was announced in October, and activists have called for another round of protests on International Women’s Day this Monday. Polling suggests that a majority of Poles back some form of liberalisation.

Anti-abortion campaigners, often guided by their religion in what remains one of Europe’s most strongly Catholic countries, say the change was needed to protect the rights of unborn children.

“An unborn child is a separate person, which has its own body and its own rights. A child must not be deprived of the fundamental right of every human being — the right to life,” Kaja Godek, one of Poland’s most prominent anti-abortion campaigners, wrote on Facebook last month.

A pro-life poster in Krakow. Many Polish opponents of abortion are guided by faith in one of Europe’s most strongly Catholic countries
A pro-life poster in Krakow. Many Polish opponents of abortion are guided by religion in one of Europe’s most strongly Catholic countries © Omar Marques/Getty Images

But activists say the ruling will force women to give birth to babies with such severe abnormalities that they have no chance of survival. They also say the government has done too little to help the families of children born with disabilities, who receive only limited support.

“I’m terrified because for me as a woman in reproductive age, it means getting pregnant in Poland became dangerous. And I’m afraid for my sister, for my colleagues and friends, for my relatives and for many other women I meet every day as clients,” said Kamila Ferenc, a lawyer from the Federation for Women and Family Planning, a women’s rights group.

“They will be in a horrible position . . . they have lost the possibility to decide freely on their own, because it’s not so easy to have an abortion outside the system.”

In the past, Polish women who could afford it were able to seek abortions in neighbouring countries with more liberal laws, such as the Czech Republic or Slovakia. But with the pandemic limiting travel, experts say women are likely to turn to the internet to buy drugs from overseas that would allow them to carry out abortions at home. Women are not prosecuted for self-managed abortions carried out before the 22nd week of pregnancy.

“It used to be the case that illegal abortions were through surgical procedures by doctors and back-alley providers. Then abortion tourism rose in the early 2000s after Poland joined the EU. Now we are seeing an increase in self-managed abortions, which can be less of a financial and emotional burden,” said Maria Lewandowska, a researcher into reproductive health at the London School of Hygiene and Tropical Medicine.

Justyna Wydrzynska, from Abortion Dream Team, a group that helps women who want to terminate their pregnancies, said that since the abortion rules were tightened in January, the organisation had received three times the normal number of calls from women seeking help.

“We get around 600 to 700 phone calls a month. Around 100 of them need to go abroad [for an abortion], and for the rest, . . . these are mostly people in need of pills, assistance in taking pills or post-abortion care,” she said.

“Often they are human dramas. Some people approach it in a task-oriented way, others very emotionally. Sometimes it is very difficult.”

Despite the huge protests last year, women’s rights groups acknowledge that as long as Poland’s conservative-nationalist Law and Justice party remains in power, the prospect of the laws being loosened is minimal. But they hope that in the long run, the debate sparked by the ruling will lead to greater support for liberalisation.

“The factual situation of pregnant women is worse. But on the other hand I think we are now on a better track to change the situation than when [the previous government led by the centre-right] Civic Platform ruled and everybody thought everything was all right,” said Ferenc.

“There is more courage in society to speak about abortion. People educate themselves and each other. I think that we now have more solidarity and strength in society to fight for reproductive rights. ”

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Hong Kong dropped from economic freedom index after crackdown




Hong Kong has been dropped from a prominent index of the world’s freest economies, underlining growing concerns over Beijing’s tightening grip on the Asian financial centre after it introduced a national security law last year.

The announcement from the Heritage Foundation, a conservative US think-tank, came as the majority of a group of 47 pro-democracy politicians were refused bail in a case that critics say shows the rapid decline of civic freedoms in the city.

The Heritage Foundation also dropped the Chinese special autonomous region of Macau, a casino hub and former Portuguese colony, from the rankings.

The foundation in recent years has been aligned with the administration of former US president Donald Trump.

“No doubt both Hong Kong and Macau . . . enjoy economic policies that in many respects offer their citizens more economic freedom than is available to the average citizen of China,” the Heritage Foundation said. “But developments in recent years have demonstrated unambiguously that those policies are ultimately controlled from Beijing.”

Beijing imposed the national security law on Hong Kong last year in response to anti-government protests that engulfed the city in 2019.

The measures are part of a clampdown on civil and political freedoms guaranteed to the city for 50 years following its handover from the UK to China in 1997. Authorities are targeting anyone viewed as disloyal to the Chinese government in politics, education and the media.

The Hong Kong government has long taken pride in studies showing its economy to be one of the most liberal in the world, with the city marketing itself as an international business haven given its low tax rates and open port.

The Heritage Foundation last year replaced Hong Kong at the top of its “Index of Economic Freedom” with Singapore, toppling it from a position it had held for 25 years, but still included the territory in the rankings in second place.

The Hong Kong government said it was ‘dismayed’ by the Heritage Foundation’s decision and said it was “politically biased”.

The case against the 47 pro-democracy lawmakers and activists has been seen as a test of whether the city’s legal system can withstand pressure from Beijing.

Authorities charged the group with subversion, alleging they aimed to topple the government by staging an unofficial primary vote to select candidates to run for election to the city’s legislature. Subversion is punishable with up to life imprisonment under the national security law.

The bail hearings, presided over by a judge appointed to oversee national security cases, entered their fourth day on Thursday.

Victor So, the judge overseeing the case, only granted bail to 15 out of 47 defendants under harsh conditions, but the prosecution immediately appealed the ruling, returning them to custody until the appeal hearing takes place. 

On top of the usual bail conditions, the court ordered the defendants to not participate in elections or make any public political statements.

Sessions have often stretched late into the evening, including one that continued until 3am before the defendants were hauled back before the court the next day. At least one defendant collapsed inside the courtroom and six others were sent to hospital for treatment.

As they exited the court, some defendants shouted: “Political criminals are not guilty, Hong Kongers will not die!”

Simon Young, a law professor at the University of Hong Kong, said the treatment of the defendants was “most unsatisfactory”. Jerome Cohen, a Chinese law expert at New York University, said the way the hearing was conducted “makes a farce of procedural fairness”.

Some of the defendants have faced multiple trials simultaneously and were forced to shuffle between courtrooms.

The defendants’ lawyers said on Tuesday their clients had not bathed in three days, forcing the judge to delay the hearing to allow them to wash.

Hong Kong has tight restrictions on reporting the substance of bail hearings.

Hundreds of supporters have queued each day in an attempt to watch the proceedings in person. Many held placards and chanted banned political slogans, risking prosecution under the security law.

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Pakistan’s finance minister ousted in surprise defeat for Imran Khan




Pakistan’s prime minister Imran Khan suffered a major political setback on Wednesday, when his finance minister was defeated in a contest for a seat in the country’s senate.

Khan must now appoint a successor to the cabinet post by June 11 under Pakistani law. The surprise defeat of finance minister Abdul Hafeez Shaikh, a respected economist and former world bank official who led the country’s negotiations with the IMF for a $6bn loan, comes amid an escalating campaign by main opposition parties to have the prime minister removed from office.

Elected officials vote to fill vacated seats in the senate every three years. Following the result, the government announced it would “take a vote of confidence in parliament” to prove that the prime minister retained a majority of support.

Business leaders have warned that Shaikh’s departure creates uncertainty over the future of Pakistan’s fiscal policies as the country battles the pandemic’s fallout on the economy.

“Right now, it was essential to give a message of confidence to a range of stake holders within and outside Pakistan on the state of our economy. Now, people will be left asking questions,” the president of a private Pakistani bank told the Financial Times.

An 11-party opposition alliance, the Pakistan Democratic Movement (PDM), has accused Khan of using the powerful military to tip the 2018 election result in his favour — which leaders from the prime minister’s party have denied — and for failing to revive the moribund economy.

The PDM has announced a March 26 deadline for Khan to step down or face widespread opposition protests.

Though some opposition leaders have said they plan to follow up Wednesday’s defeat with a vote of no confidence against Khan, analysts said it was too early to predict his downfall ahead of the end of his five-year term in 2023.

“It’s a major upset for Imran Khan and his PTI (Pakistan Justice Party),” said Huma Baqai, a political commentator at the University of Karachi. “The government from hereon will face further pressure as the opposition continues to step up its campaign.”

The vote count suggested a break in Khan’s PTI party, with as many as 16 party members either voting for the finance minister’s opponent, former prime minister Yusuf Raza Gilani, or spoiling their ballots.

Shaikh’s defeat “will not automatically lead to the prime minister’s downfall. Some PTI members clearly changed sides [for this vote]. But it will be much harder for them to agree to removing the prime minister,” an opposition leader told the FT.

Faisal Javed, a PTI leader, claimed some representatives had been bribed by the opposition. “There has been a major corruption. There has been horse-trading. People have been sold,” he told the local ARY news channel on Wednesday. Opposition leaders have denied this.

The electoral college for the senate consists of members from legislatures of Pakistan’s four provinces as well as the lower house of parliament in Islamabad known as the national assembly.

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