Some Sri Lanka creditors seeking debt restructuring deal minus China: Bloomberg

• Some committee members of SL’s official creditors pushing for debt restructuring deal without China’s participation
• They aim to sign an MoU with SL during upcoming IMF and World Bank meetings in Morocco
• Talks between SL and international bondholders ongoing, with expectation of reaching a preliminary agreement in October
• Debt restructuring plan includes a request for international bondholders to accept a 30% haircut

Some members on the committee of Sri Lanka’s official creditors are pushing to reach a deal to restructure the nation’s debt without the participation of China, Bloomberg News reported yesterday citing people familiar with the matter.
The members want the group of major creditors – including the US, Japan and India – to sign a memorandum of understanding with Sri Lanka around the time of the International Monetary Fund (IMF) and World Bank meetings scheduled for next month in Morocco, the report added.

Earlier, Reuters had reported that talks between Sri Lanka and its international bondholders will seek common ground on how much of a hit should be incurred by domestic banks and holders of debt of the country’s state-owned enterprises (SOEs), two sources with direct knowledge said.
One source said the two sides were “close to a solution” and expecting an agreement in principal to be reached in October, though a couple of issues had still to be agreed upon. Fresh talks were expected to be arranged within days, the source added.

The country of 22 million people tipped into its first foreign debt default in May 2022, after a severe shortage of dollars triggered its worst financial crisis since independence from Britain in 1948. The country has over US $ 12 billion in international bonds outstanding.

As part of its debt overhaul, Sri Lanka has asked its international bondholders to take a 30 percent haircut to help restructure its debt and the talks, which kicked off last September, are still ongoing. The debt overhaul also affects a number of SOEs – such as SriLankan Airlines.

As the world’s largest official bilateral creditor, China should participate in meaningful debt relief for countries facing problems but it has served for too long as a “roadblock” to necessary action, Treasury Secretary Janet Yellen had said in a major speech on US-China relations in April.

Yellen said the United States expected China to make good its pledge to work constructively on issues such as debt relief and climate change, noting that delays in restructuring raised costs for both borrowers and creditors.
Yellen welcomed China’s recent provision of credible financing assurances for Sri Lanka but said Washington continued to urge China’s “full participation” in providing debt treatments for Zambia, Ghana and other countries.
China has long been unwilling to accept losses on loans unless private-sector creditors and multilateral development banks shoulder their share of the burden.

“China’s participation is essential to meaningful debt relief but for too long it has not moved in a comprehensive and timely manner. It has served as a roadblock to necessary action,” 
Yellen said.
The United States and China - as the world’s largest economies - had a responsibility to work together to help emerging markets and developing countries facing debt distress, 
she said.

“China’s status as the world’s largest official bilateral creditor imposes on it the same inescapable set of responsibilities as those on other official bilateral creditors when debt cannot be fully repaid,” the treasury secretary said.

Sri Lanka’s economy shrank 3.1 percent in the April-June quarter, official data showed earlier in the month, as the country struggles to claw out of its worst financial crisis in decades.
The downturn was driven by high inflation, a depreciating currency and lower purchasing power, the Census and Statistics Department said in a statement.

The agriculture sector grew 3.6 percent from a year earlier but output from industries contracted 11.5 percent and services dropped 0.8 percent, the department said.
Sri Lanka’s Central Bank projects that gross domestic product (GDP) will shrink by 2 percent this year, having contracted 7.8 percent in 2022, after the island’s economy fell into a severe foreign exchange crisis that decimated growth.

The economy contracted 11.5 percent in the first three months of this year but activity has gradually stabilised since the government managed to secure a US $ 2.9 billion bailout from the IMF in March.
“The contraction is slowing down and we are expecting things to have bottomed out during the second quarter and then return to growth from the third quarter,” said First Capital Head of Research Dimantha Mathew.

“The July-September quarter would be the first time in six quarters that Sri Lanka may post positive growth.”
Growth readings in the third quarter will also be aided by comparison with a weak 2022, sharply lower inflation and support measures by Sri Lanka’s Central Bank, which slashed interest rates by 450 basis points in June and July to foster growth.
“We may see a faster than expected recovery of about 8 percent growth in the third quarter because there is an attempt to artificially bring back a recovery,” Mathew added. (REUTERS)