The JICA decision has been notified to the Ministry of Finance.
Earlier this year, President Gotabaya Rajapaksa’s administration requested JICA funding for a 220 kilovolt underground cable from Kerawalapitiya to the Colombo Port. While the Government usually sends a list of proposed projects at the beginning of a cycle, this time it only proposed this transmission line to JICA.
However, the Sri Lanka Government also asked Japan for a moratorium on its debt and said that it could not proceed with the JICA-funded light rail project for the next five years — despite the loan agreement having already been signed after months of negotiation — because the government did not have borrowing space.
“GoJ [Government of Japan] has concerns on the current debt situation of the Government of the Democratic Socialist Republic of Sri Lanka (hereinafter referred to as “GoSL) and the financial policy implemented by the new government,” according to a letter from JICA to the Department of External Resources of Sri Lanka’s Finance Ministry.
It refers specifically to Sri Lankan Government’s three “policies and actions” which it says the Government of Japan treats “with gravity”. They are the request for a debt moratorium from the Japanese Government, the construction of new power plants, and the project for the establishment of a light rain transit system in Colombo.
Japan will not grant clearance to proceed to the appraisal stage of Sri Lanka’s request for funding for the ‘Greater Colombo Transmission and Distribution Loss Reduction Project Phase 2’ till “the above-mentioned situations are improved”, JICA says.
But the agency says it is willing to restart the process with relation to the project once the Japanese Government “confirms the situations are improved”.
JICA has turned down project financing before but never over fiscal liability or the Sri Lanka Government requesting a debt moratorium. It is also the first time the Government has stated its financial position is bad.
For instance, JICA refused to back Phase III of the Outer Circular Highway because the Government wanted to bypass its safeguards (it was funded by the Exim Bank of China); and the Moragahakanda dam which was subsequently built by the Sinohydro China Construction Company.
The Japanese Government is worried, not only about the debt situation, but a lack of clarity on Sri Lanka’s power generation plans, authoritative sources said. Multiple projects — including a proposed LNG plant as a joint India-Japan initiative — keep getting floated and dropped.
The request for a debt moratorium and assertion that the LRT project — which Japan was “keen on” — cannot progress for the next five years indicated that Sri Lanka couldn’t repay what was already borrowed and that there was no fiscal space even to continue ongoing projects, an official source said.
“But they (Government) asked funding for a completely new project where it is not clear what the policy is with regard to generation plans,” the source said. “Separately, they have been approving loans for expensive highway projects.”
“Japan has taken the position that these policy inconsistencies have to be clarified to the satisfaction of the Government of Japan,” he added. “The biggest point for them was the LRT.”