Understanding China’s Role in Sri Lanka’s Debt Restructuring Efforts

The pulse | Economy | South Asia

Sri Lanka is on the brink of bankruptcy and has defaulted on its $51 billion foreign debt, of which $28 billion is due by 2027.

Sri Lanka’s president said on Thursday his government had launched debt restructuring talks with China, an important step in finalizing the International Monetary Fund’s rescue of the island nation from a severe economic crisis.

President Ranil Wickremesinghe told parliament Thursday that initial talks will continue after the Communist Party of China congress, which begins on Oct. 16.

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

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

Sri Lanka is on the brink of bankruptcy and has defaulted on its $51 billion foreign debt, of which $28 billion is due by 2027.

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Sri Lanka has reached a preliminary agreement with the IMF for a rescue package of 2.9 billion dollars over four years. Its completion depends on guarantees from Sri Lanka’s creditors on debt restructuring. Separately on Thursday, Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, told reporters that measures have been taken for debt restructuring.

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

Discussions were “progressing,” Weerasinghe said. But he declined to discuss the progress of the talks, saying he prefers to maintain “radio silence” to avoid hurting markets. An announcement will be made once an agreement is reached, he said.

Sri Lanka has borrowed heavily from China over the past decade for infrastructure projects including a seaport, airport and a city being built on reclaimed land. The projects did not earn enough income to repay the loans, a factor in Sri Lanka’s economic problems.

China is not Sri Lanka’s biggest creditor. It accounts for about 10 percent of Sri Lanka’s loans after Japan and the Asian Development Bank. However, Beijing’s consent to restructure its loans is crucial. It has not committed to any restructuring, although it did offer an additional loan.

Meanwhile, on Thursday, the Central Bank of Sri Lanka announced that the country’s economy is estimated to have contracted by 4.8 percent in the first half of 2022.

He also said that the economy is expected to contract in the second half of 2022 due to tighter monetary and fiscal conditions, widespread shortages of various necessities such as fuel, food and medicine, and uncertainties for businesses given the lack of accessible financing and foreign exchange. .

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