Although Sri Lankan authorities are claiming that negotiations with creditors regarding USD 2.9 billion IMF package is “progressing well”, they are yet to spell out where exactly the government’s debt restructuring efforts stand. Debt restructuring is one of the pre-requisites of IMF’s bailout package for Sri Lanka. It is getting delayed given Sri Lanka’s dire situation. Sri Lanka seems to be missing the December deadline, but Governor of the Central Bank of Sri Lanka Nandalal Weerasinghe expressed optimism that if Sri Lanka missed the December deadline to report to the IMF, “we still have time until January”.
No doubt Sri Lanka is working hard to obtain financing assurances from its diverse creditors. Observers assess that the loans obtained from China, the island nation’s largest bilateral lender, is under sharp focus, some even believing that a delay in concrete commitment from China is acting as impediment.
Opposition legislator from the Tamil National Alliance Shanakiyan Rasamanickam accused China of stalling Sri Lanka’s IMF deal and “forcing down” unnecessary projects by “paying bribes” to Sri Lankans. “If China is truly Sri Lanka’s friend, ask the Chinese to help with the [debt] restructuring and the IMF programme.” Referring to Rajapaksa-era mega infrastructure projects in Hambantota and Colombo funded by the Chinese, the Batticaloa MP said: “That is not China being Sri Lanka’s friend, that is China being Mahinda Rajapaksa’s friend.”
However, responding to the allegations, the Chinese Embassy claimed that working teams of different Chinese banks have visited the island, and “bilateral negotiations are on”. The Embassy contended that his understanding was “incorrect and incomplete.”
Months after opting for a pre-emptive and disorderly default on its USD 51 billion foreign debt, Sri Lanka reached a staff level agreement with the International Monetary Fund (IMF) in September.
The government said the programme would put Sri Lanka’s battered economy on a path to recovery and reform, making the bankrupt country eligible to borrow again from international sources.
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However, the IMF made its support contingent on Sri Lanka obtaining adequate financing assurances from all its creditors. While private lenders, mainly holders of International Sovereign Bonds, account for the largest chunk of Sri Lanka’s external debt, China, India, and Japan are the top three bilateral creditors, and play a crucial part in the ongoing negotiations.
In this scenario, research study published by the China Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies in Washington D.C., authored by Sri Lankan Economists Umesh Moramudali and Thilina Panduwawala argued that China will have to play “a major role” in Sri Lanka’s debt restructuring process with USD 7.4 billion or 19.6% Sri Lanka’s outstanding public debt owed to China at the end of 2021.
The Chinese investments under the BRI and bilateral projects with other countries have always been seen with suspicion for their lack of economic feasibility as well as debt creating potential.
Now as Sri Lanka is negotiating with China for debt restructuring and China has claimed to have shown readiness for restructuring its debt to Sri Lanka, “It will be the first time a major Asian Belt and Road Initiative borrower is going through the process… China’s approach to Sri Lanka’s debt restructuring and the extent of debt relief offered will set a precedent for China’s role and behaviour in other countries as well,” said the research report.
However, the uncertainty and lack of clarity regarding the extent and time frame of China’s restructuring of its debt to Sri Lanka is delaying its bailout package from the IMF. Meanwhile observers are wondering about the restructuring framework whether Sri Lanka is adhering to the principle of “comparative and equitable treatment” of all creditors, and the “salutary effect” the process might have on the Sri Lankan economy.
One of the silver linings is that the World Bank approved Sri Lanka’s request to access concessional financing on December 5, 2022 from the International Development Association (IDA).
This type of financing, which is offered at low interests, will enable the country to implement its government led reforms programme to stabilize the economy and protect the livelihood of millions of people facing poverty and hunger. It is a development which marks Sri Lanka going reverse in economic stature. Ali Sabry, Minister of Foreign Affairs of Sri Lanka, rightly said, “The reverse graduation to IDA will enable us to access resources to help sustain institutions to become more resilient and responsive to the needs of the people of Sri Lanka.”
The International Bank for Reconstruction and Development, a member of the World Bank group, in response to the country crisis has repurposed USD 325 million and a further USD 70 million from other regular bank operations towards crisis response for basic service needs. This has also helped leverage support from other multilateral development institutions, bilateral donors, UN agencies around a common crisis response mechanism.