China Gives Immediate Relief To Debt-Ridden Sri Lanka – Analysis

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China’s EXIM Bank says in a letter to Sri Lanka that the latter need not pay back the principal and interest due on EXIM bank’s US$ 2.8 billion loan that were due in 2022 and 2023.   

Reuters reported on Tuesday that the Export-Import Bank of China has told Sri Lanka, through a letter, that it is going to provide an extension on the debt service due in 2022 and 2023 as an “immediate contingency measure based on Sri Lanka’s request.” 

At the end of 2020, China’s EXIM bank had loaned Sri Lanka US$ 2.83 billion which is 3.5% of the island’s debt, according to an IMF report released in March last year.

According to Reuters, which had seen a copy of the letter, the EXIM bank said: “You will not have to repay the principal and interest due of the bank’s loans during the above-mentioned period.”  

“Meanwhile, we would like to expedite the negotiation process with your side regarding medium and long-term debt treatment in this window period,” it added.

“The bank will support Sri Lanka in your application for the IMF Extended Fund Facility (EFF) to help relieve the liquidity strain,” the letter further said.

Sri Lanka owed Chinese lenders $7.4 billion, or nearly a fifth of its public external debt, by the end of last year, calculations by the China Africa Research Initiative showed, according to Reuters.

India’s Offer

Earlier, India had written to the IMF saying that it would give Sri Lanka financial assurances and debt relief on the condition that Sri Lanka abides by the IMF’s conditions. It also made it clear that other creditors should chip in equitably.

The IMF has set tough debt sustainability goals for Sri Lanka for the latter to receive the IMF’s Extended Funding Facility (EFF) and get its creditors to restructure their debts. On April 12, 2022, Sri Lanka declared that it was defaulting, when it’s overall loan external burden was US$ 50 billion.   

It is understood that the IMF’s expectations from Sri Lanka in regard to the restructuring of its debts are: (1) reduction of the ratio of public debt to GDP to below 95% by 2032; (2) bringing the annual gross financing needs to below 13% of GDP on an average between 2027-2032; (3) scaling down the annual foreign currency debt service to below 4. 5 % of GDP every year between 2027-2032; (4) closing its external financing gap.

India has promised to continuing its talks with the Sri Lankan government along with the Paris Club (of creditors) on a medium-to-long term debt management through maturity extension and interest rate reduction or any other financial means that would provide financing or debt relief. 

The financing or debt relief provided by the Export-Import Bank of India will be consistent with restoring debt sustainability under the IMF-supported program, India has said. According to one calculation, Sri Lanka owes US$ 1 billion to India.

Sri Lanka’s Job

Sri Lanka will have to seek equitable debt treatments from all commercial creditors and other official bilateral creditors, as well as adequate financing contributions from the multilateral development banks. India will support Sri Lanka’s efforts in this direction. India will keep having in-depth discussions with the Sri Lankan authorities, the IMF and the Paris Club of creditors.  

Other Creditors

Given the Indian and Chinese moves, Japan is expected to follow suit as India and Japan are allies vis-a-vis Sri Lanka. The United States comes into the picture because most of Sri Lanka’s private creditors are from the US. These private creditors own almost 40% of Sri Lanka’s external debt stock, mostly in the form of international sovereign bonds.

The private creditors also get higher interest rates on the basis of risk in lending to Sri Lanka. They receive more than 50% of external debt repayments, according to economists.

These private lenders pose a problem because they are generally averse to restructuring their debt. One US lender went to court immediately after Sri Lanka defaulted in April 2022. But still, there is optimism that an equitable and acceptable solution will be found to satisfy all creditors.

P. K. Balachandran

P. K. Balachandran is a senior Indian journalist working in Sri Lanka for local and international media and has been writing on South Asian issues for the past 21 years.

One thought on “China Gives Immediate Relief To Debt-Ridden Sri Lanka – Analysis

  • January 24, 2023 at 9:32 pm
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    That indeed is a good relief not just for Sri Lanka but for it’s international friends. Good to see China and India (working) in this together!

    Reply

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