Colombo [Sri Lanka], September 13 (ANI): Sri Lanka has reached an agreement with the International Monetary Funds (IMF) regarding debt restructuring which will start only after all Sri Lankan creditors agree to restructure their existing loans to the island nation. On the other hand, while China keeps mum over the issue, IMF bailout discussions still remain at the staff level of agreement.
All Sri Lankan creditors including China have to agree to restructure their existing loans to the island nation before the IMF starts disbursing a USD 2.9 billion loan, but China‘s silence on the issue and IMF bailout discussions still remain at the staff level of agreement, Colombo Gazette reported.
Sri Lanka has agreed to a USD 2.9 billion deal with IMF officials, but cash will not flow to Colombo until significant progress is made on debt restructuring with China, Japan and India mainly. The IMF staff and the Sri Lankan authorities have reached a staff-level agreement to support Sri Lanka‘s economic policies with a 48-month arrangement under the Extended Fund Facility (EFF) of about USD 2.9 billion.
The new EFF arrangement will support Sri Lanka‘s program to restore macroeconomic stability and debt sustainability, while safeguarding financial stability, reducing corruption vulnerabilities and unlocking Sri Lanka‘s growth potential.
One of the conditions was also to reduce corruption vulnerabilities through improving fiscal transparency and public financial management, introducing a stronger anti-corruption legal framework, and conducting an in-depth governance diagnostic, supported by IMF technical assistance, Colombo Gazette reported.
At a recent press conference with IMF officials in Colombo on September 1, the question of what would happen if China refused to commit to debt restructuring was raised, to which the IMF mission head replied, “If one or more creditors are unwilling to provide these assurances, that would obviously aggravate the problem here in Sri Lanka and undermine repayment capacity.”
China has so far not agreed to debt restructuring which could include haircuts or reductions in interest rates. Instead, China has expressed its willingness to refinance Sri Lanka to repay its past loans without any changes, said Lankan officials.
Beijing said as a traditional friendly neighbor of Sri Lanka and a major shareholder of the International Monetary Fund, China has been always encouraging the IMF and other international financial institutions to continue to play a positive role in supporting Sri Lanka‘s response to current difficulties and efforts to ease debt burden and realize sustainable development.
As to the bilateral financial cooperation, shortly after the Sri Lankan government announced to suspend of international debt payments in April 2022, Chinese financial institutions reached out to the Sri Lankan side and expressed their readiness to find a proper way to handle the matured debts related to China and help Sri Lanka to overcome the current difficulties. “We hope Sri Lanka will work actively with China in a similar spirit and work out a feasible solution expeditiously,” Colombo Gazette reported.
Sri Lankan Foreign Minister Ali Sabry is optimistic that China will agree to restructure its loan repayment, as have Japan and India. In addition, President Ranil Wickremesinghe is planning a visit to Japan on September 25, 2022, in order to suggest that Japan summon the creditors to assist Sri Lanka in obtaining an IMF bailout.
Since Sri Lanka gained independence in 1948, there has never been a crisis of this magnitude; it was brought on by years of poor financial management by succeeding Sri Lankan governments and the Gotabaya Rajapaksa regime’s choice to forego addressing the IMF to prevent the country from amassing debts.
The current situation has driven people from their homes to work overseas, and flee illegally on boats to neighboring India and Australia besides serious unrest that led to the detention of youths under the harsh Prevention of Terrorism Act.
Several protests took place against the government when the financial crisis had a negative influence on food security, the availability of gasoline, and the price of cooking gas.
The government of Gotabaya was warned for rejecting the International Monetary Fund (IMF) bailout to relieve the people from mounting debts that the government had to repay. The former Central Bank governor Ajith Nivard Cabraal without taking an independent decision basically did politics to avoid IMF bailout and sought countries like China to support Sri Lanka.
China has been a close associate of the Rajapaksa regime and accused of corrupt dealings with them. The government by then had defaulted foreign debt payments to several countries too and the country sank.
The country owes more than USD 51billion to foreign lenders, including USD 6.5 billion to China. The G7 group of countries – Canada, France, Germany, Italy, Japan, the UK and the US – had said it supports Sri Lanka‘s attempts to reduce its debt repayments.
Despite China being convinced that Sri Lanka needs the IMF bailout, China is concerned about caving in to US pressure since the US is a geopolitical adversary, Colombo Gazette reported. The IMF bailout of Sri Lanka in fact could be a roadblock to China‘s ability to finance Sri Lanka and secure additional infrastructure projects for its strategic Belt and Road Initiative (BRI).
One of the IMF’s requirements is that the crisis-hit Sri Lanka should refrain from pursuing any further loan-facilitated projects. The IMF has also determined that some of Sri Lanka’s major Chinese projects have been ineffective and that Sri Lanka cannot proceed with similar endeavors in the future. Also, the US is using subtly the IMF facilities to control China‘s maritime power struggle.
Sri Lanka is one of China‘s BRI’s choke points. China is at a crossroads now. It must either restructure its debt or antagonize Sri Lanka and become a laughingstock in the South Asian region. There is speculation that China would suggest it will refinance the debt including the interest.
The impasse will persist until China relents. Sri Lanka will know whether or not debt restructures by Sri Lanka‘s creditors is successful after the donor conference in Japan that is scheduled to take place. If the IMF bailout does not materialize, there is also the possibility that Sri Lanka may turn to China for help, the report said.
However, Sri Lanka has undoubtedly leveraged its strategic location to maintain the confrontation between China and the West in order to defuse its desire to gain from these major powers. (ANI)
United States asks China to cooperate with Sri Lanka’s debt structuring
Colombo [Sri Lanka], September 13 (ANI): A United States diplomat asked China to cooperate with Sri Lanka’s debt restructuring and advised the island nation to be responsible for future borrowings while agreeing to participate in the re-structuring of Sri Lanka’s debt.
As per the local media, Economy Next, United States Agency for International Development (USAID) chief Samantha Power, who was recently on a two-day visit to Colombo, said, “China should co-operate with Sri Lanka’s debt re-structuring while the country should engage in responsible borrowings in the future.” “As Sri Lanka seeks to emerge from this economic crisis, the US as a creditor and a member of the Paris club stands ready to participate in the re-structuring of Sri Lanka’s debt,” She added.
The deepening economic crisis of Sri Lanka has put the country in a bad shape after its foreign reserves ran out following two years of money printing and defaulted in April 2022. The rupee collapsed from 180 to 360 to the US dollar in the worst crisis in the history of the island’s intermediate regime central bank. The island nation is now trying to restructure its debt before International Monetary Fund starts disbursing the loan.
She said that all the Sri Lankan creditors, including China, have to agree to restructure their existing loans to the island nation before the IMF starts disbursing the loan, Economy Next reported. “It is imperative that all of Sri Lanka’s creditors, most notably the People’s Republic of China, co-operate in this process openly and on comparable terms with each other. When debt becomes unsustainable as it so clearly has in Sri Lanka, the stakes of that cooperation can mean the difference between life or death or prosperity or poverty,” Power said.
The US diplomat further said that the details of the debt restructuring will be handled by the US Treasury but Sri Lanka had to change the way it borrowed. “I think what we have seen is not only the restructuring of debt but also of changing habits that gave rise to the accumulation of that debt in the first place,” she added.
She said bureaucratic reforms and attempts to make Sri Lanka more export competitive mattered.
China’s lending to Sri Lanka, some of which was done for so-called white elephants has drawn criticism. It is estimated that Sri Lanka owes debt payments of USD 2 billion this year to China, one of Sri Lanka’s biggest creditors.
However, others have also pointed out that monetary instability played a key role in the accumulation of debt as the country lost the ability to repay foreign debt with current inflows in 2015, 2016, 2018, 2020 and 2021, resorting to ‘bridging finance’ style external borrowings.
Sri Lanka’s commercial debt rose from 5.0 billion dollars to 14 billion from 2014 to 2020 as the country experienced two currency crises and net foreign debt after reserves went up from around 17 billion dollars to 28 billion dollars not counting borrowings by the Ceylon Petroleum Corporation.
A senior International Monetary Fund (IMF) official said that Sri Lanka’s ongoing economic crisis would deepen if China disagrees on debt restructuring. He said that China would not go along with Western creditors on debt restructuring on an equal footing.
Notably, China has so far not agreed to debt restructuring which could include haircuts or reductions in interest rates. Instead, China has expressed its willingness to refinance Sri Lanka to repay its past loans without any changes, said Lankan officials, reported Sunday Islands Online.
Earlier, after a meeting with IMF delegates, Sri Lankan President Ranil Wickremesinghe requested China to restructure its debt amid a severe economic crisis and shrinking foreign reserves, but Beijing has chosen to maintain a deafening silence which reveals how disinterested the country is to extend a helping hand to the island nation at this need of the hour.
The meeting with the Head of State came after the delegates of the global lender kicked off discussions with Dr Weerasinghe in the morning, to finalise a staff-level agreement for a possible USD 3 billion bailout package, including restructuring debt of about USD 29 billion.
An International Monetary Fund (IMF) statement on the eve of its visit highlighted, albeit obliquely, that the China factor is set to shape Sri Lanka’s economic fortunes. On the prospects of giving Sri Lanka a multibillion-dollar bailout, the fund said, “Because Sri Lanka’s public debt is assessed as unsustainable, approval by the IMF Executive Board of the Extended Fund Facility programme would require adequate assurances by Sri Lanka’s creditors that debt sustainability will be restored.” (ANI)
