• “Debt negotiations could be complicated by debt owed to China”- Sagarika Chandra, Director Sovereigns at Fitch ratings 
• Sri Lanka owes China US$ 6.5bn through a combination of development loans and swap line 
• China had traditionally preferred to offer debt relief for large loans by way of deferrals
• But Fitch says this approach could increase challenges for SL to successfully negotiate debt restructuring with other creditors
• Also points out IMF reforms could be a tough pill to swallow and they could even invite further public agitation 

China continuously pops up as one of the key sticking points for Sri Lanka to reach the much needed debt sustainability as Fitch Rating this week too weighed in on the matter saying that the world’s second biggest economy could complicate the island nation’s debt talks with its creditors.

In a fresh note, which assessed the still prevalent political risks that could challenge Sri Lanka’s emergence from a default, the rating agency singled out Chinese debt as one of the key challenges in successfully negotiating debt restructuring with other creditors.

“Debt negotiations could be complicated by debt owed to China,” said Sagarika Chandra , the Director Sovereigns at Fitch ratings.

The fresh concerns from Fitch came a day after the International Monetary Fund (IMF) pushed Sri Lanka to deal with China proactively in restructuring its debt owed to the latter, which accounts for about 13 percent of the country’s total external debt stock.

According to Institute of International Finance data, Sri Lanka owes China US$ 6.5 billion through a combination of US$ 5.0 billion worth of development bank loans and US$ 1.5 billion equivalent swap line with the People’s Bank of China. 

Before Sri Lanka froze its debt repayments on April 12, the country had been in talks for debt relief with China by way of debt restructuring, extended bilateral funding and unlocking its existing swap line for imports. 

 But, nothing happened and it made all the difference as the economy collapsed in March after it ran out of its external reserves available to fund its crucial imports, causing widespread social unrest due to massive hardships which forced the then government and the President to resign.

Two weeks ago, Sri Lanka’s envoy to China Palitha Kohona disclosed that US$ 4.0 billion worth of financial assistance was under negotiation with the Chinese authorities and it could materialise at some point.   Back in April, China balked at Sri Lanka’s move to default on its loans and seek IMF bailout. 

On the matter of debt restructuring, Fitch said China had traditionally preferred to offer debt relief for large loans by way of deferrals such as maturity extensions, payment rescheduling or grace periods, rather than write-downs.  “However, this approach could increase challenges for Sri Lanka to successfully negotiate debt restructuring with other creditors, including private creditors, who deliver the debt sustainability sought by the IMF,” Chandra opined. Sri Lanka restored relative calm after parliament voted to elect Prime Minister Ranil Wickremesinghe as the President, which made possible the formation of a new interim government. 

While this is an important precondition for resolving Sri Lanka’s debt default, Fitch said many challenges remain as implementing tough reforms under a potential IMF deal could prove extremely hard as they could inflict pain on many as such reforms could entail further higher taxes and expenditure rationalisation. 

“There is significant risk that such reforms could cause public opposition that might impede their implementation. In the absence of an IMF deal, we expect Sri Lanka to face a very strained external position in the near term”, Chandra said.