Can Sri Lanka downgrade from middle-income to low-income country to get foreign funds?

With Sri Lanka still on a weak wicket on the economic and financial fronts, it is looking at newer ways to access finances. The government is debating a proposal to downgrade the country from a middle-income to a low-income country in a bid to get concessionary loans meant for vulnerable countries.

If the cabinet clears the proposal, the government will convey the change in the country’s status to the World Bank, reported Sri Lankan newspaper, The Sunday Times.

Associate Professor in the Department of International Relations at the South Asian University (SAU), Dhananjay Tripathi told India Narrative that Sri Lanka once had high human development indicators in South Asia. “That the country is now thinking of downgrading itself, shows the objective reality in the country. There is a lot of financing available for low-income countries from various international organisations. Also, these loans can be accessed at low interest rates”.

Tripathi highlighted that Beijing is still not forthcoming on restructuring Colombo’s debt.

“China has been giving loans to the least developed and the developing countries. Many of them, including Sri Lanka, are not in a position to repay those loans. If China announces a debt-restructuring  plan for Sri Lanka, many other nations across the world will expect China to waive off their loans as well. This poses a dilemma for China also”, says Tripathi.

He says that with other lenders like Japan and India supporting Sri Lanka over debt restructuring, a way out for China may be to cut a deal with Sri Lanka quietly.

For almost a year now Sri Lanka has been facing a severe economic crisis. During this time it has faced a food crisis, a fuel and power shortage and mass unrest which often turned violent and paved the way for the deposing of the powerful Rajapaksa family from the top echelons of power.

For the first time in history Sri Lanka announced in early 2022 that it will not be in a position to meet its foreign debt obligations. With most countries staying away from Sri Lanka’s economic crisis, India became the only country to step in with a $4 billion support in various forms to avert a humanitarian crisis in the island nation.

Though with a change in the government in Colombo, the global sentiment towards the country has improved, Sri Lanka still faces a crisis of inflation, low foreign reserves and raising bail-out funding.

The Sri Lankan media reported that a downgrade will enable the country to “obtain concessionary funding from the International Development Association (IDA) — an arm of the World Bank that helps the world’s poorest and most vulnerable countries”. This move also indicates that Sri Lanka does not have the creditworthiness to borrow on market terms, therefore, will need concessional resources to finance its development.

Meanwhile, with the 2022 annual meetings of the International Monetary Fund (IMF) and the World Bank taking place today, the Sri Lankan Finance Minister Shehan Semasinghe is leading a team to Washington to negotiate funding for the cash-strapped country.

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