Paris Club creditors indicate readiness for debt talks with SL; China’s position still unclear

The Paris Club creditors, an informal group of official creditors largely consisting of western nations, have expressed their readiness to negotiate with Sri Lanka for debt relief following the island nation securing a staff-level agreement for a 48-month, US$ 2.9 billion Extended Fund Facility with the International Monetary Fund (IMF).

“We note the IMF’s assessment for the need for a debt treatment in the context of the IMF programme,” a statement issued by the Paris Club Secretariat said.
“The Paris Club is ready to start the debt treatment process and reiterates its willingness to coordinate with non-Paris Club official bilateral creditors to provide the necessary financing assurances in a timely manner and ensure fair burden sharing, as already proposed to the other large official 
bilateral creditors.

The Paris Club remains at the disposal of Sri Lankan authorities and non-Paris Club official bilateral creditors to further discuss the next steps of the debt treatment process,” it added.
However, most of Sri Lanka’s debt remains with creditors who are not members of the Paris Club. For example, India and China, who are among the two creditors to Sri Lanka are not full members of the Paris Club.

While India has shown keenness to work with the Sri Lankan authorities to provide debt relief in a bid to help the country make its debt sustainable, China’s position remains unclear as of now.
Following the announcement of the staff-level agreement, the Chinese embassy in Colombo issuing a statement said, “Shortly after the Sri Lankan government announced to suspend 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.”

However, the statement stopped short of giving any specific indication whether China will come on board with a broader debt restructuring exercise, which is likely to be organised by Japan at the request of Sri Lanka.
Sri Lanka getting any IMF financing is contingent upon the island nation obtaining assurances from both its official and private creditors for debt relief, most likely by way of haircuts, as IMF has assessed Sri Lanka’s debt unsustainable.