Debt restructuring talks; Sri Lanka begins crucial talks with China

Sri Lanka’s government has started debt restructuring discussions with China, an important step toward finalizing an International Monetary Fund rescue of the island nation from a severe economic crisis, President Ranil Wickremesinghe said Thursday.

President Wickremesinghe told Parliament on Thursday that initial talks will continue after China’s Communist Party congress, which begins Oct. 16.

Crisis-hit Colombo’s negotiations with its creditors have become a barometer of how lenders respond to rising global debt distress, with Beijing’s role drawing particular international scrutiny.

Wickremesinghe, who recently returned from a trip to Tokyo, said the Japanese government had agreed to mediate the talks with China.

“China has been supporting us from ancient times and we believe they will do the same in these difficult times,” Wickremesinghe said.

China, which has lent around $7bn to Sri Lanka through its Belt and Road infrastructure project, had previously resisted Colombo’s requests to restructure debt or to offer substantial further assistance.

China has agreed to help Sri Lanka in facing the economic crisis, but so far has not committed for any debt restructuring plan.

Sri Lanka is nearly bankrupt and has suspended repaying its $51 billion foreign debt, of which it must repay $28 billion by 2027.

Sri Lanka has reached a preliminary agreement with the IMF for a $2.9 billion rescue package over four years. Its completion hinges on assurances from Sri Lanka’s creditors on debt restructuring.

Separately on Thursday, Nandalal Weerasinghe, the governor of Sri Lanka’s Central Bank, told reporters that steps have been taken towards debt restructuring.

Sri Lanka has made a presentation to global creditors and held meetings with financial advisors, donor countries and commercial creditors.

The discussions were “going forward,” Weerasinghe said. But he declined to discuss the progress of the discussions, saying he prefers to maintain “a radio silence” to avoid affecting markets. An announcement will be made once an agreement is reached, he said.

Sri Lanka borrowed heavily from China over the past decade for infrastructure projects that include a seaport, airport and a city being built on reclaimed land. The projects failed to earn enough revenue to pay for the loans, a factor in Sri Lanka’s economic woes.

China is not Sri Lanka’s biggest creditor. It accounts for about 10% of Sri Lanka’s loans after Japan and the Asian Development Bank. However, Beijing’s assent for restructuring its loans is crucial. It has not committed to any restructuring, though it offered an additional loan.

Meanwhile, during his address, Wickremesinghe also thanked Prime Minister Narendra Modi for India's extensive support during the crisis faced by Sri Lanka. "We always received support from Prime Minister Modi. During the recent crisis, we received extensive support from India and I have extended my gratitude to them on several occasions," the President said.

Wickremesinghe said that Sri Lanka would continue to get the support of India to come out of the ongoing crisis. "We have already received positive responses from India," the President said, adding that he spoke to Prime Minister Modi when he met him in Japan recently. 

Last week, Japanese Finance Minister Shunichi Suzuki said Japan is prepared to do its part over Sri Lanka's debt issue, but other creditors, such as China and India, should also be involved in efforts to resolve it.

In the latest development to the matter, Shunichi Suzuki said on Friday (October 7) that Japan remains committed to back Sri Lanka debt restructuring if conditions are met.

Suzuki also told reporters financial leaders from the Group of 20 major economies would discuss global food and energy concerns and any impact from monetary tightening on the world economy when they gather Washington next week.

Meanwhile, Paris Club creditors reached out to China and India to coordinate Sri Lanka’s debt-restructuring talks, according to a person familiar with the matter, in an attempt to bring major global creditors together to rework the obligations of emerging economies.

The club, an informal group of mostly rich, western bilateral creditors, is awaiting a response from both countries after it sent an official request in late August to work together, said an official who declined to be identified because talks are continuing. 

Coordinating on Sri Lanka may result in the formation of an official creditors committee or simply holding regular meetings to share information on debt treatment, the official said.

Last month, Samantha Power, Administrator of the United States Agency for International Development (USAID) said that China must cooperate with Sri Lanka in its debt restructure process.

“The United States as a creditor, and as a member of the Paris Club, stands ready to participate in the restructuring of Sri Lanka’s debt. It is imperative that all of Sri Lanka’s creditors, most notably the People’s Republic of China cooperate in this process openly and on comparable terms with each other,” she said.

Meanwhile, the World Bank said on Friday that Sri Lanka’s economic crisis is deepening with unsustainable debt and a severe balance of payment crisis on top of lingering scars of the COVID-19 pandemic.

Debt restructuring and the implementation of a deep reform program are critical for Sri Lanka’s economic stabilization, the World Bank said in its twice-a-year update, underscoring the need for Sri Lanka to build resilience.