Japan urges Sri Lanka to restructure debt swiftly

Colombo, May 4 (The Japan Times) - Strategically placed Sri Lanka's economic recovery is essential for stability in the Indo-Pacific region, Japanese Foreign Minister Yoko Kamikawa said Saturday, urging Colombo to swiftly restructure its foreign debt.

After talks with her Sri Lankan counterpart, Ali Sabry, Kamikawa said that Colombo should secure agreements with bilateral lenders and international sovereign bondholders to unlock suspended foreign funding.

The Sri Lankan government which defaulted on its $46 billion external debt in April 2022, had hoped to finalize deals with foreign creditors by April but there have been no final agreements yet.

Kamikawa said she "stressed the importance of reaching a debt restructuring agreement with all the creditors," including China — the largest bilateral lender to the island.

"I also conveyed Japan's intention to further support Sri Lanka's development by swiftly resuming existing yen loan projects (after a debt restructuring deal)," she said.

She said Tokyo considered Colombo's economic recovery to be crucial for the entire region. The island is located halfway along the main east-west international shipping route.

"The restoration of stability and economic development of Sri Lanka, which is at a strategic location in the India Ocean, is essential for the stability and prosperity of the entire Indo-Pacific region," she added.

Sri Lanka must secure agreement from all official creditors and a majority of private bondholders to continue with a four-year, $2.9 billion bailout loan that began in March last year.

Japan, the second largest bilateral lender to the island, has expressed concern about China's big infrastructure projects in Sri Lanka and elsewhere in the region.

Tokyo maintains that the Chinese-funded projects did not meet international finance standards.

Unable to repay a huge loan taken from China in 2017 to build a deep sea port in southern Hambantota, Sri Lanka handed it over to a Chinese firm for $1.12 billion on a 99-year lease.

Sri Lanka ran out of cash to pay for even the most essential imports in 2022, leading to chronic shortages of food, fuel and medicines.

Then-President Gotabaya Rajapaksa, who faced allegations of mismanagement and corruption, was forced to flee the country and resign in July 2022 after months of protests.

His successor, Ranil Wickremesinghe, has raised taxes, cut subsidies and is enforcing painful economic reforms in line with the IMF bailout.

Also Saturday, the two countries agreed to work to resume stalled bilateral projects, including a $1.5 billion Japanese-funded light railway. Sri Lanka pulled out of the rail project in 2020, when it was moving closer to China under Rajapaksa.